[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                       POTENTIAL MIXED MESSAGES: 
                      IS GUIDANCE FROM WASHINGTON 
                      BEING IMPLEMENTED BY FEDERAL 
                            BANK EXAMINERS? 

=======================================================================

                             FIELD HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            AUGUST 16, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-54


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee





















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    August 16, 2011..............................................     1
Appendix:
    August 16, 2011..............................................    57

                               WITNESSES
                        Tuesday, August 16, 2011

Barker, Gil, Southern District Deputy Comptroller, Office of the 
  Comptroller of the Currency (OCC)..............................    11
Bertsch, Kevin M., Associate Director, Division of Banking 
  Supervision and Regulation, Board of Governors of the Federal 
  Reserve System.................................................    12
Copeland, Chuck, CEO, First National Bank of Griffin.............    33
Edwards, Bret D., Director, Division of Resolutions and 
  Receiverships, Federal Deposit Insurance Corporation...........     9
Edwards, Jim, CEO, United Bank...................................    39
Fox, Gary L., former CEO, Bartow County Bank.....................    41
Rossetti, V. Michael, President, Ravin Homes.....................    36
Spoth, Christopher J., Senior Deputy Director, Division of Risk 
  Management Supervision, Federal Deposit Insurance Corporation..     7

                                APPENDIX

Prepared statements:
    Barker, Gil..................................................    58
    Bertsch, Kevin M.............................................    81
    Copeland, Chuck..............................................    89
    Edwards, Bret D., joint with Christopher J. Spoth............    93
    Edwards, Jim.................................................   113
    Fox, Gary L..................................................   116
    Rossetti, V. Michael.........................................   142
    Spoth, Christopher J., joint with Bret D. Edwards............    93

              Additional Material Submitted for the Record

Westmoreland, Hon. Lynn:
    Written responses to questions submitted to Gil Barker.......   146
    Written responses to questions submitted to Kevin M. Bertsch.   151
    Written responses to questions submitted to Bret Edwards and 
      Christopher J. Spoth.......................................   155
    Letter from the American Institute of Certified Public 
      Accountants (AICPA)........................................   160
    AJC op-ed....................................................   162
    Letter to Chairman Bachus and Chairwoman Capito from Andrew 
      Alexander..................................................   164
    Written statement of the American Association of Bank 
      Directors..................................................   166
    American Banker op-ed........................................   170
    Written statement of the Community Bankers Association of 
      Georgia (CBA)..............................................   172
    Written statement of First Cherokee State Bank...............   176
    Written statement of the Georgia Bankers Association (GBA)...   180
    Letter to Chairman Bachus and Chairwoman Capito from William 
      and Deborah Lytle..........................................   183
    Written statement of Jerry Ownby.............................   186
    Letter to Chairman Bachus and Chairwoman Capito from K.J. 
      Sturhahn & D'Aunn Sturhahn.................................   187
    Written statement of the American Land Rights Association 
      (ALRA).....................................................   190
    Written statement of Hon. Jaime Herrera Beutler, a 
      Representative in Congress from the State of Washington....   200


                       POTENTIAL MIXED MESSAGES:
                      IS GUIDANCE FROM WASHINGTON
                      BEING IMPLEMENTED BY FEDERAL
                            BANK EXAMINERS?

                              ----------                              


                        Tuesday, August 16, 2011

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:05 a.m., in 
the Coweta County Performing Arts Center, 1523 Lower 
Fayetteville Road, Newnan, Georgia, Hon. Shelley Moore Capito 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Westmoreland; and 
Scott.
    Ex officio present: Representative Bachus.
    Chairwoman Capito. This hearing will come to order.
    First, I would like to thank Mr. Westmoreland for bringing 
this issue to the attention of the Financial Institutions and 
Consumer Credit Subcommittee. He has been a tireless advocate 
in the House--as all of you in the audience know--for his 
constituents and the financial institutions in his district.
    And I would also like to thank our witnesses for traveling 
to Newnan to testify and answer questions.
    For those of you in the audience, we will be maybe a little 
less formal than we might be in the regular committee hearing 
room.
    I should introduce myself. I'm Shelley Moore Capito, the 
Chairwoman of the Financial Institutions and Consumer Credit 
Subcommittee of the Financial Services Committee. Spencer 
Bachus, from Alabama, is the chairman of the full Financial 
Services Committee.
    Let me just explain the format, so you will all understand 
what we are going to do. We will do opening statements as 
Members, and then we will have two panels, which will consist 
of regulators and then bankers from in and around the region. 
They will have 5 minutes to give an opening statement and then 
we will be able to ask them questions. I am going to be pretty 
lenient on the question-and-answer period because I think that 
is where we glean the most information. But I do have my handy-
dandy gavel that made it through TSA, so we are very happy 
about that.
    I also wanted to thank you for welcoming us to Georgia. By 
way of information, my grandparents were born in Perry, 
Georgia, so I have good credentials for Georgia. And I have 
quite a bit of family over in Columbus. And of course, I do 
remember the 2006 Sugar Bowl when West Virginia beat Georgia, 
but we will not talk about that. Sorry, I just had to bring it 
up.
    Anyway, the topic of this field hearing is critical to the 
overall economic recovery in the United States. Over the past 
few years, members of this subcommittee have heard accounts 
about over-zealous regulators and bank examiners from small 
business owners and financial institution executives. The 
subcommittee has held two hearings this year on the issue of 
mixed messages from Washington.
    In the sense that regulators in Washington are encouraging 
institutions to lend, while examiners in the field are applying 
restrictive standards that make it very difficult to lend, this 
hearing is a continuation of the mixed messages discussion. One 
of the major hurdles to a true economic recovery for both small 
businesses and financial institutions is uncertainty.
    New regulations created by the Dodd-Frank Act are only 
furthering the uncertainty for institutions, and subsequently 
our small businesses. We must work together to closely examine 
the application of regulations on financial institutions to 
ensure that the appropriate balance is reached between ensuring 
safe and sound institutions and providing the certainty 
necessary for encouraging economic growth.
    I want to stress that these concerns are not rooted in an 
effort to return to the regulatory landscape in the pre-
financial crisis levels. There should be a healthy level of 
regulation of financial institutions. However, there needs to 
be room for institutions to take calculated risks when lending 
to spur economic development. Many members of this subcommittee 
fear that the pendulum has potentially swung too far to one 
extreme. We will continue to examine the issue of mixed 
messages from Washington-based regulators throughout this 
Congress.
    Finally, I would like to thank our second panel of 
witnesses for providing their perspective today. I know that 
many financial executives are hesitant to come forward publicly 
with their experiences with financial regulators. But it is 
important that their accounts be part of the public record.
    Again, I would like to thank my very good friend, Mr. Lynn 
Westmoreland, for graciously hosting the subcommittee in his 
district this morning.
    I look forward to hearing the testimony of all of our 
witnesses and I hope this continues a productive discussion 
forward.
    Now, I will recognize the chairman of the Financial 
Services Committee, Mr. Bachus, for 5 minutes for the purpose 
of making an opening statement.
    Chairman Bachus. I thank the chairwoman of the subcommittee 
for holding this hearing, and I particularly thank her for 
holding it outside Washington. I think it is important for 
Congress and for the regulators to actually visit Main Street, 
visit really in this case almost ground zero with many of our 
banks. I would also like to thank Mr. Westmoreland who, along 
with Mr. Scott, introduced a bill last month that actually came 
out of the committee on a unanimous vote and passed the 
Congress 6 days later. You hear a lot about partisanship. That 
was bipartisanship. And it expressed a concern that I think we 
all share, and when I say that, I mean the regulators, the 
bankers, Members of Congress, and business people, that we can 
do better in addressing the problems in our economy and 
problems in our community banks.
    America is made up really in our diversity and our 
diversity in our financial system is one of our strengths. One 
of the biggest strengths is the fact that we have many choices 
for consumers, and many times those choices are Main Street 
banks or local banks. People deal with people that they know, 
they know their reputation, they can--they do not have to bank 
with an institution where decisions are being made thousands of 
miles away. They can bank with an institution that is locally 
owned. And that is something that I know the regulators are 
committed to preserving.
    I was looking at the numbers on Georgia. About 1 out of 6 
bank failures in the country have occurred here in Georgia, and 
in fact, over the last year it looks like it is more like 24 to 
25 percent, which is pretty astounding.
    The bank regulators--to their credit--on February 10th of 
last year issued a joint policy statement. They all came 
together and I really believe that policy statement, which I am 
sure we will go into a little this morning, if we abide by that 
policy statement at the local level, we will be successful. And 
basically one thing it said, it actually specifically permitted 
reputational loans. It permitted banks to make decisions which 
did--in fact, all loans incur a certain amount of risk, but it 
actually enabled banks to make loans based on reputation.
    Many of our bankers tell us that they cannot make 
reputational loans, that the bank examiner simply will not 
allow that. And of course, a reputational loan has to have 
certain basic things, the borrower has to have the ability to 
pay it back, he has to have an income stream. So it is not just 
based on someone with a good reputation; it is someone who can 
pay that back.
    Let me close by saying two things. One thing is as we have 
this hearing, I think it is important to distinguish between 
the word ``regulation'' and the word ``management.'' I have 
talked to bankers, regulators, and Members of Congress, and I 
think we all agree that the regulators are to regulate, the 
bankers are to manage. Sometimes, the boundary between that 
line is blurred or difficult. But it is important that we 
allow, in the final instance, the bankers to make the 
decisions, as long as those decisions do not violate safety and 
soundness.
    Let me say one last thing. There is also a difference 
between liquidation and resolution. I have often heard the 
regulators say, ``We have resolved this situation.'' What 
actually has been done is they have liquidated the bank. And 
that is a failure. I think ultimate success would be restoring 
that institution to health and that ought to always be the 
priority. Sometimes, that is simply not possible. I can tell 
you that there have been banks in my hometown of Birmingham, 
Alabama, which simply could not be restored to health, and the 
longer they operated, the more exposure to the taxpayer. But I 
have also on occasions felt as if the message coming from the 
regulators was, ``we have successfully resolved this 
institution,'' and that ought to always be a last resort. And 
sometimes, I fear that it has been done, and actually because 
of loan loss agreements and sharing agreements, actually the 
cost has been greater than restoring that institution to 
health. But at the same time, I do not want to second-guess the 
regulators.
    Thank you, Chairwoman Capito, for allowing me to 
participate and thank you, Mr. Scott and Mr. Westmoreland, two 
fine Members of Congress. And Mr. Westmoreland, as we all know, 
and Mr. Scott, have been bipartisan leaders in this issue. 
Thank you.
    Chairwoman Capito. Thank you, Mr. Chairman.
    I would like to recognize Mr. Lynn Westmoreland, Third 
District of the beautiful State of Georgia, for an opening 
statement.
    Mr. Westmoreland. Thank you and I want to welcome everybody 
to Georgia's Third Congressional District and I want to thank 
Chairwoman Capito and Chairman Bachus and Congressman Scott for 
coming down. I want to thank all the witnesses for coming.
    Madam Chairwoman, will we have 5 days for people to 
submit--5 business days--
    Chairwoman Capito. Yes.
    Mr. Westmoreland. Thank you.
    Chairwoman Capito. Actually, we will have 30 days. The 
hearing record will stay open for 30 days to submit statements.
    Mr. Westmoreland. Thank you.
    And again, thank you, Chairman Bachus, for helping us move 
this bill so quickly and Subcommittee Chair Capito, especially 
for--Spencer, you did not have that far to come, but Shelley 
did, so thank you all for coming to listen to this hearing on 
our bank failures and the mixed messages that the regulators 
are sending to our community bankers.
    I would also like to thank the witnesses for traveling here 
today and all those in the audience who have made this trip to 
join us.
    In Georgia, bank failures are the major threat to the well-
being of our communities. Banks in Georgia, both strong and 
weak, big and small, are trying to survive in a market where 
the government is picking winners and losers every day, and 
especially on Fridays. I know, I wait every Friday for the 
dreaded email to come from the FDIC that yet another bank in 
Georgia has failed.
    As many of you know, and we have experienced personally, 67 
Georgia banks have failed since 2008. That is 25 percent of our 
banks. Sadly, there are some communities in my district that no 
longer are served by a community bank. If you ride up and down 
34 highway, and I am sure it is a wonderful bank, but you will 
see the Bank of the Ozarks in our community.
    I hear every week from bankers across Georgia that 
regulators just are not listening, or being able to use any 
common sense or even wanting to help. And curiously, some of 
these regulators have never even worked in a bank and never 
even made a loan.
    In the 1980s, the agencies testifying today took much 
criticism from the handling of the savings and loan crisis. Lax 
enforcement of the rules created more failures. However, the 
great community bank crisis of 2008 has seen regulatory swing 
in a completely opposite direction. Now, strict enforcement has 
created more failures. Banks that were too-big-to-fail have 
survived; banks too-small-to-save have been cut loose. I am 
convinced there must be some middle ground between these two 
extremes.
    Our communities every day are losing generational wealth 
that the pillars of these communities have put into these 
banks. That money will never come back.
    The main problem I have experienced is there is both too 
much and too little information to evaluate the job the 
regulators have been doing. Without a doubt, the FDIC is a 
wealth of information about the health of banks if you have the 
time and resources to go through it. However, I felt more 
analysis was needed. Therefore, myself and Congressman Scott 
introduced H.R. 2056 to study the underlying fundamentals that 
continue to cause bank failures across this country. The bill 
directs the FDIC Inspector General, in consultation with the 
Treasury and Federal Reserve IGs, to study the FDIC policies 
and practices with regard to shared-loss agreements, the fair 
application of regulatory capital standards, appraisals, the 
FDIC procedures for loan modifications, and the FDIC's handling 
of consent orders and cease and desist orders. Further, the GAO 
also has a study in the bill to pursue those questions the FDIC 
IG is unable to fully explore, such as the causes of the high 
number of bank failures, the impact of fair value accounting, 
the analysis of the impact of failures on the community, and 
the overall effectiveness of shared-loss agreements for 
resolving banks.
    Thanks to Chairman Bachus and Subcommittee Chair Capito, 
this bipartisan bill moved quickly through the Financial 
Services Committee and passed the House on July 28th by voice 
vote.
    On the other side of the Capitol, our colleague from 
Georgia, Senator Saxby Chambliss, took this on and tried to get 
it passed before the August recess in the same bipartisan 
spirit in which it passed the House. Unfortunately, the FDIC 
and the American Institute of Certified Public Accountants have 
both blocked the study from moving forward. I hope the FDIC and 
the AICPA will state here for the record that they will reach 
out to the Senate so all objections will be removed and this 
bill will pass quickly in early September.
    To the bankers and small business owners testifying here 
today, I appreciate the honest assessment of your experience in 
this tough business environment. There has been a longstanding 
struggle from my office to receive an honest assessment of the 
job the regulators are doing, from the businessmen willing to 
come forward and share their experience for the record. And I 
appreciate your courage. We had a number of people who would 
tell us their story, but were unwilling, because of fear of 
retaliation, to come testify today. And that is a shame.
    To those in the audience, know that while I would like to 
have everyone testify today, my office is always willing to 
submit your experience for the record and we have 30 days to do 
that. And furthermore, I hope the regulators on this first 
panel will remain in the room for the second panel and listen 
to what they have to say. Too many times, the first panel of 
the government officials will come in, testify, and then leave. 
We are not in D.C., I hope you do not have anywhere to go, and 
we will make sure you get a good lunch if you will stick around 
and listen to some of these people that we listen to each and 
every day.
    In closing, Georgia is in a banking crisis. To overcome 
this crisis, regulators, examiners, and bankers must work 
together to further investment in our small businesses and 
create jobs.
    With that, Madam Chairwoman, I yield back.
    Chairwoman Capito. Thank you.
    I would like to introduce Congressman David Scott from the 
13th District of Georgia. Mr. Scott is a very forceful member 
of the subcommittee and the full committee and he has been out 
front with Mr. Westmoreland on this particular issue. Welcome, 
Mr. Scott, and thank you.
    Mr. Scott. Thank you, thank you very much. And I certainly 
want to welcome you, Chairwoman Capito, to Georgia and our 
chairman, the distinguished chairman who does an extraordinary 
job on our committee and is a great personal friend to me, 
Chairman Bachus, thank you for coming. And of course, Lynn, it 
is always a pleasure working with you. Lynn and I go all the 
way back to our days in the Georgia legislature, and it has 
been a pleasure working with you, bringing forward this very 
important bill.
    This is a very, very serious issue and we will never be 
able to find our way out of this economic doldrum that we are 
in and get the kind of recovery that we need unless our banks 
are thriving and they are able to lend money.
    Our banks are like the heart of our system. Like the heart 
pumps out the blood, banks pump out the credit and pump out the 
cash and pump out the lending to small businesses, to 
individuals so that our economy can grow.
    But when we have a rash of bank failures in one geographic 
area of the United States which account for over 25 percent of 
all of the bank closures, and in less than 4 years, over 60 
banks in this one State fail, we have to dig deep and find out 
what happened. And I think that is one of the biggest 
contributions that we can make today with our distinguished 
committee and representatives. We have to find out from the 
FDIC, the Office of the Comptroller of the Currency, and the 
Fed, all of our examiners and regulators, what went wrong, why 
did this happen. And if the discovery comes out to be, as many 
have said, that so many of our banks overleveraged their 
portfolios into real estate, well if we knew this, why didn't 
some red flags go up? So, we have some serious questions to ask 
here.
    And then secondly, what can we do now to make sure that we 
have no more bank closures in this State? Just recently, we had 
a couple of banks close. So the situation goes on.
    I think there have to be some very serious questions asked. 
I think that we have to examine the impact of mark-to-market 
accounting, what role that played in it. I think we also have 
to make sure--and I want to echo what Lynn said, because we 
have two panels here: we have the regulators; and we have the 
examiners. It is important that the examiners stay so that you 
can hear from our banking folks, so they can have an 
opportunity to put the issues right before them.
    We have had many hearings on this issue. We hear from our 
friends in the banking community who basically say the 
regulations are too stringent, they are putting too much 
pressure, particularly pressure in terms of an issue just 
simply as asset write-downs, which require and put enormous 
amounts of pressure on banks that go out in a hurry and raise 
capital. We need to examine this to see if this is the correct 
procedure. And then we need to come out of this figuring out 
what, in Washington, are we doing that we need to correct 
ourselves. And I think if we look very closely and examine each 
of these questions and really be as frank and as honest as we 
can today, we will make a great contribution, not just in terms 
of the banking situation here in Georgia, but this is the 
epicenter and I think the great contribution we will make here 
is that we will be able to provide valuable information going 
forward for our entire country because other parts of the 
United States are suffering from this as well.
    I look forward to this hearing. I also would like to get 
some opinions from our panelists on the impact of our bill. Is 
it enough? Can we do more? In the process, as we go and 
continue to negotiate this bill, are there some more things we 
need to add to it to make it stronger?
    So this is going to be a good hearing, and I am really 
looking forward to it. And I thank you all for your 
participation.
    Chairwoman Capito. Thank you, Mr. Scott.
    Now, we will go to the panel. Our first witness is Mr. 
Christopher J. Spoth, who is the Senior Deputy Director, 
Division of Risk Management Supervision for the Federal Deposit 
Insurance Corporation, better known as the FDIC. Welcome, Mr. 
Spoth.

  STATEMENT OF CHRISTOPHER J. SPOTH, SENIOR DEPUTY DIRECTOR, 
   DIVISION OF RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Mr. Spoth. Chairman Bachus, Chairwoman Capito, and members 
of the subcommittee, Congressman Westmoreland, Congressman 
Scott--
    Chairwoman Capito. If I could ask you--I think you have to 
really lean into the microphone so everybody can hear you.
    Mr. Spoth. I apologize.
    Thank you so much for the opportunity to testify here 
before the committee. As the Senior Deputy Director of the 
Division of Risk Management, I oversee the FDIC's safety and 
soundness examination program. Twice in my FDIC career, I lived 
in Georgia, and it is a pleasure to be back today, and outside 
of Washington, as you say.
    The FDIC is the primary Federal regulator for State-
chartered banks that are not members of the Federal Reserve 
System. We supervise 4,700 banks. Georgia has 261 banks and the 
FDIC is the primary Federal regulator for 211. We have field 
offices in Atlanta, Albany, and Savannah, plus a regional 
office in Atlanta. Our examiners are knowledgeable about the 
economic challenges confronting banks and their customers. The 
FDIC works closely with the Georgia Department of Banking & 
Finance.
    Georgia's economy was hit especially hard by the housing 
market collapse in 2007 and the financial crisis and economic 
recession that followed. The pace of economic recovery has been 
slow, and conditions in Georgia remain challenging. The State's 
unemployment is higher than the national average, and its banks 
have lost money for 10 consecutive quarters. The non-current 
rate for construction and development loans in Georgia has been 
over 20 percent for 2 years. High levels of construction and 
development lending have been a common characteristic of failed 
banks, and Georgia had the highest construction rate of any 
State in 2007.
    We are keenly sensitive to the hardship that bank failures 
pose to communities and borrowers. Our supervisory goal is 
always to avert a bank failure by initiating timely corrective 
action. Most problem banks do not fail. In fact, most banks 
across the country are in sound condition, well-capitalized and 
profitable, although Georgia has been affected more than most.
    Community banks play a vital role in credit creation. While 
community banks represent only 11 percent of industry assets, 
they provide 38 percent of bank loans to small businesses and 
farms. However, surveys of bankers and businesses have 
identified three primary obstacles to making loans at this 
time: lack of demand from creditworthy borrowers; market 
competition; and the slow economy.
    In response, the FDIC has adopted policies that can help 
community banks and their borrowers. Since 2008, the banking 
agencies have issued statements encouraging banks to lend to 
creditworthy borrowers, to prudently restructure problem 
commercial real estate loans, and to meet the credit needs of 
small business. The FDIC sponsored a small business forum 
earlier this year. Chairman Bachus attended and spoke at that 
forum.
    The FDIC's examination program strives for a balanced 
approach. Examiners conduct fact-based reviews of a bank's 
financial risk, the quality of its loan portfolio, and 
conformance with banking regulations. In analyzing a loan, our 
examiners focus on the borrower's cash flow. If the borrower 
cannot pay the principal and interest, then the examiner will 
consider any collateral or guarantees. We do not focus on 
distressed property sales. Loans at risk of non-payment are 
usually identified by the bank itself. At the conclusion of 
their examination work on site, FDIC examiners always discuss 
their preliminary findings with the bank management. This 
provides an opportunity to express the bank's point of view on 
findings, recommendations, and the supervisory process. We 
conduct more than 2,500 on-site examinations annually, and we 
recognize that questions and disagreements may arise, 
especially during difficult economic times.
    The FDIC has a number of channels available for bankers to 
appeal examination matters. Care is taken to ensure national 
consistency. We ensure that examiners follow prescribed 
procedures and FDIC policy through our national training 
program and commissioning process, internal quality reviews, 
and ongoing communication at every level. Members of our board 
of directors and all of our Washington and regional executives 
are dedicated and involved in this effort.
    The FDIC welcomes feedback and relies on bankers' informed 
perspectives. We meet regularly with banker groups to discuss 
the examination process. A significant resource is our advisory 
committee on community banking established in 2009. This 
committee, which includes a community banker from Georgia, 
provides us with advice and guidance on a range of policy 
issues. Our Atlanta regional office meets regularly with banker 
groups and has welcomed all opportunities to meet with bankers. 
The FDIC's Regional Director, Tom Dujenski, is here in the 
audience today.
    I will now turn it over to my colleague, Bret Edwards. I 
will be pleased to answer any questions, and I heartily accept 
the invitation to stay and listen to the banker panel.
    [The joint prepared statement of Mr. Spoth and Mr. Bret 
Edwards can be found on page 93 of the appendix.]
    Chairwoman Capito. Thank you, Mr. Spoth.
    And now our second witness is Mr. Bret D. Edwards, 
Director, Division of Resolutions and Receiverships at the 
FDIC. Welcome, Mr. Edwards.

STATEMENT OF BRET D. EDWARDS, DIRECTOR, DIVISION OF RESOLUTIONS 
    AND RECEIVERSHIPS, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Bret Edwards. Thank you. Chairwoman Capito, Chairman 
Bachus, and members of the subcommittee, I appreciate the 
opportunity to testify on how the FDIC resolves failed banks, 
and in particular on the shared-loss agreements we have 
employed during the current crisis.
    Throughout the financial crisis, the FDIC has worked to 
maintain financial stability and public confidence in the 
banking system by giving insured depositors of failed banks 
quick and easy access to their funds.
    When a bank is closed by the Comptroller of the Currency or 
a State banking commissioner, the law requires the FDIC to use 
the least costly method of resolving the failed bank in order 
to minimize the costs of bank failures to the Deposit Insurance 
Fund or the DIF.
    With each bank failure, we use a bidding process to find a 
bank to take over the performing and non-performing assets of 
the failed bank, along with the bank's deposits and other 
liabilities. Such a whole bank resolution has benefits for the 
failed bank's borrowers and the community, as well as the DIF. 
The bank's borrowers benefit because the assuming bank is a 
potential new source of credit. And the community benefits from 
stabilized asset values. In addition, because the failed bank's 
assets are managed by the assuming bank, the FDIC's asset-
related expenses are significantly less than they would be if 
the FDIC were to manage and liquidate these assets on its own. 
Finally, everyone benefits when these assets are managed rather 
than put into an already strained market at fire sale prices.
    During the current financial crisis, turmoil in the economy 
and significant uncertainty about future loan performance and 
collateral values have made potential buyers of failed banks 
reluctant to take on the risk of the failed bank's non-
performing loan portfolios. As a result, the FDIC has often 
been required to use a modified version of the whole bank 
resolution that includes a shared-loss agreement. This was 
particularly true during the early stages of the crisis. The 
FDIC estimates the use of shared-loss agreements has saved the 
DIF, and the thousands of banks that fund the DIF, almost $40 
billion during the current crisis.
    Unfortunately, a small percentage of failing banks still do 
not attract viable bids because they have little or no 
franchise value, and the quality of their assets is very poor. 
In those instances, the FDIC pays the depositors the insured 
amount of their deposits and depositors with uninsured funds 
and other general creditors are given receivership certificates 
entitling them to a share of the net proceeds from the 
liquidation of the failed institution's assets. Typically in a 
payout like this, there is no new source of credit available 
for troubled borrowers.
    Since the crisis began in 2007, the FDIC has successfully 
found banks to take over 61 of Georgia's 67 failed banks. 
Forty-one of the 67 banks were acquired by Georgia-based 
institutions, while 10 other acquirers are from contiguous 
States.
    Under shared-loss agreements, the assuming bank takes 
ownership of the failed bank's assets and the FDIC agrees to 
absorb typically 80 percent of the losses on a specified pool 
of assets, while the assuming bank is liable for the remaining 
20 percent of the losses. Each assuming bank is required to 
utilize a least loss strategy in managing and disposing of 
these assets.
    Shared-loss agreements soften the effect of bank failures 
on the local markets by keeping more of the failed bank's 
borrowers in a banking environment. The assuming bank can more 
easily work with the borrowers to restructure problem credits 
and advance additional funding where prudent. And in fact, 
shared-loss agreements require assuming banks to review 
qualified loans for modification to minimize the incidences of 
foreclosure. Because the assuming banks share approximately 20 
percent of any losses on covered loans, they are motivated to 
restructure a loan whenever a modification would produce a 
greater expected return than a foreclosure or short sale. We 
also require assuming banks to manage covered assets just like 
their own portfolio, consistent with prudent business practices 
and the bank's credit policies. The incentives for pursuing 
modifications and the requirement for consistent treatment of 
assets work together to prevent a fire sale strategy.
    The FDIC monitors compliance with the shared-loss 
agreements, including the requirement to consider loan 
modifications through quarterly reporting by the assuming bank 
and performing periodic reviews of the assuming bank's 
adherence to the agreement terms. To enforce compliance with 
the agreement, the FDIC will delay payment of loss claims until 
compliance problems are corrected. We can also deny payment of 
a claim altogether or cancel a shared-loss agreement, if 
compliance problems continue.
    While we believe the shared-loss agreements have 
significant benefits, as the economy improves, we expect to see 
fewer resolutions with loss share.
    Thank you for allowing me to testify today and I look 
forward to your questions.
    [The joint prepared statement of Mr. Spoth and Mr. Bret 
Edwards can be found on page 93 of the appendix.]
    Chairwoman Capito. Thank you.
    Our third witness will be Mr. Gil Barker, the Southeast 
District Deputy Comptroller for the Office of the Comptroller 
of the Currency. Welcome, Mr. Barker.

STATEMENT OF GIL BARKER, SOUTHERN DISTRICT DEPUTY COMPTROLLER, 
        OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)

    Mr. Barker. Chairwoman Capito and members of the 
subcommittee, I appreciate this opportunity to discuss the 
OCC's supervision of community banks and the steps that we take 
to ensure that our supervision is balanced, fair, and 
consistent with OCC policies.
    My district supervises more than 650 federally-chartered 
community banks and thrifts, including 45 national banks and 
thrifts in the State of Georgia. I have been involved in the 
direct supervision of community banks for most of my career, so 
I have a deep appreciation for the challenges that these 
bankers face.
    Community banks play a crucial role in providing consumers 
and small businesses with essential financial services and 
credit that is critical to economic growth and job formation. 
Our goal is to ensure that these banks have the strength and 
the capacity to meet these credit needs.
    I understand that some bankers believe that they are 
receiving mixed messages from regulators about the need to make 
loans to creditworthy customers, and I appreciate the 
opportunity to address these issues today.
    The OCC's policies encourage banks to make loans to 
creditworthy borrowers and to work constructively with 
borrowers. We have mechanisms to help ensure that our examiners 
apply these policies in a consistent and balanced manner. We 
alert our examiners to new policy issuances via weekly updates. 
When warranted, we supplement these issuances with targeted 
supervisory memos that provide additional direction for 
implementing on a consistent basis. We reinforce these messages 
through periodic national teleconferences and meetings at our 
local field offices.
    We have quality assurance processes to ensure that our 
examiners are applying our guidance consistently. Every report 
of examination is reviewed and signed off by an appropriate 
Assistant Deputy Comptroller before it is finalized. Additional 
levels of review occur when enforcement actions are involved. 
Our formal quality assurance processes assess the effectiveness 
of our supervision and compliance with OCC policies through 
quarterly randomly selected reviews of the supervisory record. 
While a bank's supervision policies and procedures establish a 
consistent framework and expectations, our examiners tailor 
their supervision to each bank and its individual risk profile 
and business model.
    Our front line managers who are located in the local 
communities are given considerable decision-making authority, 
reflecting their on-the-ground knowledge of the institutions 
that they supervise. To support our local examiners, we have 
district analysts who monitor and provide information on local 
markets and conditions. This information allows us to tailor 
our supervisory activities to unique challenges being faced 
within local economies and business sectors.
    We also have an extensive outreach program with State trade 
associations and we meet with our State and Federal regulatory 
counterparts to share information and discuss issues.
    OCC examiners assess the quality of the bank's loan 
portfolio during each examination cycle. The goal of our 
reviews is to confirm the accuracy of bank management's own 
assessments of credit quality. If a borrower's ability to repay 
a loan becomes impaired, we expect the bank to classify the 
loan to recognize the increased risk.
    To provide consistency in the examination process, the OCC 
and other bank agencies use a uniform risk scale to identify 
problem credits. Consistent with generally accepted accounting 
principles, the call reports require that a loan be put on non-
accrual status when full repayment of principal and interest is 
not expected. In making these decisions, each loan must be 
evaluated based on its own structure, terms, and the borrower's 
ability to repay under reasonable repayment terms. A loan is 
not classified simply because a borrower is based in a certain 
geographic region, when they operate in a certain industry, or 
because the current market value of the underlying collateral 
has declined. Our supervision strives to ensure that problems 
are identified and addressed at an early stage before they 
threaten the bank's viability. When these efforts are not 
successful and the bank is not viable, we work closely with the 
FDIC to effect early and least cost resolution of the bank.
    The OCC's supervisory philosophy is to have open and 
frequent communications with the banks that we supervise. While 
I believe that OCC examiners are striking the right balance in 
their decisions, my management team and I encourage any banker 
who has concerns about a particular examination finding to 
raise these concerns with their examination team, with the 
supervisory office, with me directly, with the OCC's 
independent ombudsman.
    Thank you, and I would be happy to answer questions 
afterwards.
    [The prepared statement of Mr. Barker can be found on page 
58 of the appendix.]
    Chairwoman Capito. Thank you, Mr. Barker.
    And our final witness on this panel is Mr. Kevin Bertsch, 
Associate Director, The Board of Governors of the Federal 
Reserve System. Welcome.

STATEMENT OF KEVIN M. BERTSCH, ASSOCIATE DIRECTOR, DIVISION OF 
 BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Mr. Bertsch. Thank you.
    Chairwoman Capito, Chairman Bachus, and members of the 
subcommittee, I appreciate the opportunity to appear before you 
today to discuss the Federal Reserve's efforts to ensure a 
consistent approach to the examination of community banking 
organizations. Community banks play a critical role in their 
local communities. The Federal Reserve very much values its 
relationship with community banks and is committed to 
supervising these banks in a balanced and effective way. 
Developments over the past few years have been particularly 
challenging for these institutions, and the Federal Reserve 
recognizes that, within this context, supervisory actions must 
be well considered and carefully implemented.
    The Federal Reserve conducts its supervisory activities 
through its 12 Federal Reserve Banks across the country. This 
means that supervision is guided by policies and procedures 
established by the Board, but is conducted day-to-day by the 
Reserve Banks and their examiners, many of whom have lived and 
worked within the districts they serve for many years. We 
believe this approach ensures that Federal Reserve supervision 
of community banks is consistent and disciplined and that it 
also reflects a local perspective that takes account of 
differences in regional economic conditions.
    There has been much discussion recently about whether 
examiners are unnecessarily restricting the activities of 
community banks. The Federal Reserve takes seriously its 
responsibility to address these concerns, and working with the 
other agencies, the Board has issued several pieces of 
examination guidance over the past few years to stress the 
importance of taking a balanced approach to supervision. The 
Federal Reserve has complemented these statements with training 
programs for examiners and outreach efforts to the banking 
industry. In addition, the Federal Reserve continues to 
strongly reinforce the importance of these statements with its 
examiners and has taken steps to evaluate compliance with the 
guidance as part of its regular monitoring of the examination 
process.
    First, all examination findings must go through a thorough 
review process before being finalized. Local management teams 
vet the examination findings at the district Reserve Banks to 
ensure that problem areas are addressed consistently, findings 
are fully supported, and supervisory determinations conform 
with Federal Reserve policies. If these vetting sessions 
identify policy issues requiring clarification, local Reserve 
Banks contact the Board in Washington for guidance.
    In addition, Board analysts sample recently completed 
examination reports to assess compliance with policies. 
Potential deviations from policy requirements that are 
identified through this process are discussed with Reserve 
Banks and corrected as needed. Board analysts also review 
quarterly off-site financial surveillance reports with the 
Reserve Banks to ensure identified issues are consistently and 
promptly addressed.
    Board staff also conduct periodic reviews of specific 
examination activities. For example, recently we undertook a 
focused review of commercial real estate loan classification 
practices in the districts. We initiated this review to assess 
whether Federal Reserve examiners were implementing the inter-
agency policy statement on commercial real estate loan workouts 
as it was intended. Based on this review, we concluded that 
Federal Reserve examiners were appropriately implementing the 
guidance and were consistently taking a balanced approach in 
determining loan classifications.
    Overall, our monitoring efforts to date suggest that 
Federal Reserve examiners are following established guidance in 
evaluating supervised institutions. However, if any banking 
organizations are concerned about supervisory actions that they 
believe are inappropriate, we continue to encourage them to 
contact Reserve Bank or Federal Reserve Board supervisory staff 
to discuss their concerns.
    We at the Federal Reserve are acutely aware of the need for 
a strong and stable community banking industry that can make 
credit available to creditworthy borrowers across the country. 
We want banks to deploy capital and liquidity, but in a 
responsible way that avoids past mistakes and does not create 
new ones.
    The Federal Reserve is committed to working to promote the 
concurrent goals of fostering credit availability and 
maintaining a safe and sound banking system. Through our 
ongoing communication with Reserve Banks and bankers, the 
Federal Reserve will continue to strive to ensure our guidance 
is applied in a fair, balanced, and consistent manner across 
all institutions.
    Thank you again for inviting me to appear before you today 
on this important subject. I will be pleased to take your 
questions. Thank you.
    [The prepared statement of Mr. Bertsch can be found on page 
81 of the appendix.]
    Chairwoman Capito. Thank you. I appreciate the testimony 
and we will begin with questioning. Each member will have 5 
minutes on the first round, and I am going to begin.
    I think the question I am asking could be appropriate to 
everybody, but it might be most appropriate to the FDIC 
witnesses. Being a resident of a different State and coming to 
Georgia and seeing 25 percent of the bank failures occurring in 
this particular region, my question is, what is different in 
Georgia? We know that the recession is a national one, we know 
that half of the houses in Las Vegas are in neighborhoods that 
are underwater. What is particular to Georgia in the regulatory 
review that causes it to have the greater share of the bank 
failures?
    Mr. Spoth. I am happy to start to answer that question, 
Chairman.
    It is a very thoughtful question and one that I think about 
all the time. What is it that happened in Georgia? And as I 
said, I lived here, I left in 2002, the second time that I was 
here living in the Atlanta area. What the numbers show, and 
what my feeling was at the time, was that Atlanta had, or more 
generally, the State of Georgia had high economic growth in the 
run-up to the housing collapse in 2007. Credit was available, 
readily available, for construction supporting that growing 
economy, and there were rising real estate prices. Not many 
expected the collapse of housing. Some of the issues that 
caused that collapse were masked in the non-bank arena through 
subprime mortgages and some similar issues. I think that is 
what happened. Why it affected Georgia more than others was 
probably, as a principal reason, the high amount of exposure to 
construction and development lending.
    Chairwoman Capito. Mr. Edwards, do you have another 
comment?
    Mr. Bret Edwards. I would concur with that, that is exactly 
right, the high level of construction and development loans on 
the books of the banks, especially as we got to the peak of the 
market, was a big factor.
    Chairwoman Capito. So that is different than what is 
occurring in some of these other high real estate areas--
Florida, Arizona, New Mexico, Texas?
    Mr. Spoth. It is somewhat different in scale. All of those 
States experienced a similar phenomenon with rising real estate 
prices.
    Chairwoman Capito. Right, right.
    Mr. Spoth. What was different in Georgia is that it had the 
highest concentration of construction and development loans 
relative to the capital base, compared to others.
    Chairwoman Capito. So then my follow-up question would be 
during that period of time when you were conducting reviews of 
these particular banks, that was not a red flag at the time?
    Mr. Spoth. It was a red flag. Maybe some of my other 
colleagues will talk about it. We issued guidance in 2006 to 
the industry talking about concentrations and risk management 
around commercial real estate and acquisition, development and 
construction lending generally. Would there be lessons learned 
behind that and mistakes made? Probably so.
    Chairwoman Capito. In the regulatory reaction, you are 
talking about?
    Mr. Spoth. Yes. The red flags were not always carried all 
the way through to the supervisory process.
    Chairwoman Capito. Mr. Bertsch, in our conversation before 
we began our testimony, you mentioned that you have sort of 
ridden through this tide before when you were in Boston as a 
regulator in the downturn of the real estate market in Boston 
in the early 1990s, and that you are seeing a lot--a lot of 
what you are hearing us talk about is a lot of what was talked 
about in the 1990s. What were the solutions at that time and, I 
guess, how do we find ourselves back in the same position, 
understanding that there are economic issues here on a national 
basis that are sort of more beyond control of community bankers 
in Georgia and others?
    Mr. Bertsch. I think a lot of what the regulators have been 
doing has been, to some degree, looking back in history to see 
what helped the New England crisis sort of slow down and how 
that was sort of addressed. I think if you look at, for 
example, the prudent commercial workout, commercial real estate 
workout guidance that all the agencies issued after the initial 
guidance that Chris referenced, that is basically designed to 
encourage banks to work with their borrowers and do formal 
restructurings of loans because that actually did work fairly 
well in terms of addressing some of the issues that occurred in 
New England.
    Now neither situation was very good for the banking 
industry. Just as now Georgia is experiencing a very high level 
of failures, it was similar in New England back in the late 
1980s and early 1990s, and some of these same questions were 
being asked.
    But I think the thing we learned through the New England 
issue was that we need to give the banks an opportunity to 
restructure the loans and that if they restructure the loans, 
they can, some of them, can survive. But that does mean that 
some of them have to recognize some losses and some problems in 
some of the transactions before they can move forward and see 
those transactions come back to a performing asset.
    Chairwoman Capito. Thank you.
    Chairman Bachus is recognized for 5 minutes for questions.
    Chairman Bachus. Thank you.
    Let me ask the FDIC this question. Loss sharing agreements, 
obviously that has been a real focus and area of concern. My 
first question would be--and these are things we have heard 
from more than one source--is that banks who come in and take 
over these loans do not have the incentive to modify those 
loans when the borrower gets in financial trouble. There is 
almost maybe an incentive to close those loans out. And that is 
particularly problematic when there is a participation 
agreement I guess would be the word, between other banks on 
those loans. That is sometimes where we hear the complaints.
    Do you monitor those and is there a possibility of maybe--
or have you changed the way those are structured maybe to 
address that? Have you heard that before?
    Mr. Bret Edwards. Yes, we have heard that before and 
obviously it is a concern to us, because we took a lot of care 
in crafting those agreements as what we feel is the best 
solution to dealing with the assets coming out of failing 
banks.
    We do believe that the way the shared-loss agreements work, 
we share the losses, 80 percent with us, 20 percent with the 
assuming bank, we believe that gives them a pretty significant 
incentive, as we call it, skin in the game, to ensure that 
their behavior, their incentives in these agreements are 
aligned with ours--which is, we want them to pursue the least 
loss strategy for each and every asset.
    Additionally--and I will get to the monitoring in a 
second--I just want to make it clear that the agreement 
basically says they must manage the assets that they take in 
through a shared-loss agreement the same as their assets that 
are already on their books. So let us talk about compliance for 
a second. They do extensive reporting to us, we have compliance 
management contractors go out and do a thorough review of their 
compliance with these agreements. The agreement requires them 
to consider modifications in doing an analysis. So we have a 
bank credit, we look at all the disposition alternatives. If it 
is a troubled credit, they are required to do an analysis and 
demonstrate to us or our contractors as we go in to check with 
compliance, that they have documented, analyzed, and are 
following the least loss strategy on every credit.
    So we are relatively comfortable that the banks are 
incented to follow the least loss strategy--and they are also 
required to--and we also check that they are doing that. So I 
feel that is--but again, I have heard the same things and that 
concerns us and what I would say with respect to that is, if 
there are specific instances where folks feel that they are 
seeing behavior where that is not occurring, we would want to 
know about that.
    Chairman Bachus. Okay. Have you heard any complaints from 
other banks when there are participation agreements?
    Mr. Bret Edwards. Sure. With participation agreements--and 
again, generally what happens with those participation 
agreements is it depends on whether you are the lead 
participant, in other words you are the manager of that loan, 
or you are a downstream participant, as we say. Where the 
assuming institution is under a shared-loss agreement, they 
take the lead, from our perspective, again, the requirement in 
the agreement is they should be managing that loan just like 
any other loan in their portfolio and that includes, with 
respect to participation agreements, and I am sure my 
examination colleagues would tell you, they should be regularly 
and actively communicating with the other participants in that 
loan about what their disposition strategy is if it is a 
troubled credit, and follow the terms and conditions of that 
participation agreement.
    Chairman Bachus. I know that Congressman Westmoreland and 
Congressman Scott both mentioned mark-to-market. And I know 
that even in 2008, when we first ran into trouble, mark-to-
market came up. Chairman Bernanke actually, within 6 months or 
a year, said mark-to-market is a problem. In some cases, it is 
exacerbating the problem. He testified probably on at least two 
or three occasions that it was a concern to the OCC, which has 
expressed concerns.
    In fact, we actually passed a provision that the SEC would 
look at the impact of mark-to-market and consult with the 
banking regulators. And they actually came out and instructed 
the accounting, the different accounting boards, to address the 
problem, which they sort of did in what has been called by many 
in the academic field a superficial addressing, because you had 
sort of a conflict between investors and the institutions as to 
what those assets were valued.
    Can you update me on any of your thoughts on mark-to-
market? In fact, two former OCC Chairmen have testified that 
had mark-to-market been in effect in earlier recessions, there 
would have been many more bank failures than they had. And they 
were quite outspoken about that. I had a conversation with Don 
Powell--whom you are very familiar with--who headed up the 
agency, and he said that was a real problem. He had left the 
agency at that time.
    But would you comment on that?
    Mr. Barker. Congressman Bachus, I can tell you that from 
the examiner's perspective, when they go in and they conduct 
reviews of a loan portfolio, they are looking to see the 
ability of the borrower to make repayment. They look at the 
cash flow, they look at the current status of the loan, they 
look at the prospects for continued payment. In fact, the only 
time that mark-to-market would come into play is when the loan 
is no longer being able to be repaid, and then the valuation of 
the collateral comes into play. So it is at that point when the 
examiners would go beyond an assessment of the cash flow and 
make a determination as to whether there is sufficient 
collateral, and then apply mark-to-market standards as they 
exist right now, as part of their examination activity.
    Chairman Bachus. Okay. So you do not always follow mark-to-
market in just determining whether a loan needs to be further 
reserved?
    Mr. Barker. We apply the standards first looking at the 
cash flow and the borrower's ability to make the payments. As 
long as those payments are continuing to be made, the 
assessment of the collateral position is very secondary, much 
after the cash flow analysis.
    Chairman Bachus. All right. That is good news, thank you 
very much.
    Chairwoman Capito. Thank you.
    Mr. Westmoreland?
    Mr. Westmoreland. Thank you, Madam Chairwoman.
    Mr. Barker, you mentioned in your testimony that you have a 
deep appreciation for the challenges of those bankers.
    Mr. Barker. Yes.
    Mr. Westmoreland. Have you ever been in the banking 
business?
    Mr. Barker. Only as a regulator, sir.
    Mr. Westmoreland. Only as a regulator. And how long have 
you been there with the regulators?
    Mr. Barker. I have been with the Comptroller of the 
Currency's Office for 33 years.
    Mr. Westmoreland. So you must have gone straight to work 
there after you graduated college?
    Mr. Barker. Yes, I did.
    Mr. Westmoreland. So you have never actually made a loan to 
anybody?
    Mr. Barker. No, I have not.
    Mr. Westmoreland. You have never been on the banker's side 
of the desk making a loan?
    Mr. Barker. No.
    Mr. Westmoreland. Have any one of you ever--since we have 
had 67 bank failures, how many times have you all been to 
Georgia to actually go into some of these banks or communities 
that have had the large number of failures? I will start with 
you, Mr. Spoth.
    Mr. Spoth. I have been to our--this microphone again.
    Chairman Bachus. These microphones are not as sensitive as 
those in Washington, so you might want to pull them pretty 
close.
    Mr. Spoth. I have been to our offices here in Atlanta.
    Mr. Westmoreland. No, I mean how many banks have you been 
to?
    Mr. Spoth. I meet with the bankers when they are in the 
Washington office.
    Mr. Westmoreland. How many local banks have you been to 
here?
    Mr. Spoth. Meet with Georgia banks in Georgia?
    Mr. Westmoreland. Yes.
    Mr. Spoth. I have not met with any in Georgia in recent 
years. Regional Director Dujenski meets with them all the time.
    Mr. Westmoreland. Good. Mr. Edwards?
    Mr. Bret Edwards. No, I have not. I assumed this position 
in January of this year.
    Mr. Westmoreland. Okay. Mr. Barker?
    Mr. Barker. I have met with several community banks in the 
State of Georgia as part of our supervisory process.
    Mr. Westmoreland. So you went physically to those that were 
being audited I guess or whatever?
    Mr. Barker. Yes.
    Mr. Westmoreland. And how many of those closed?
    Mr. Barker. Three of those banks have closed.
    Mr. Westmoreland. And so you went to three and all three 
closed?
    Mr. Barker. Yes.
    Mr. Westmoreland. Okay. Sir, do you ever get out much?
    [laughter]
    Mr. Bertsch. When they let me out, periodically I do get 
out.
    Chairman Bachus. He is out today.
    Mr. Bertsch. I have not been in any of the banks in 
Georgia. I would refer you back to our testimony that we do our 
supervision directly through the Reserve Banks and that is 
typically how our visits are conducted.
    Mr. Westmoreland. Okay. Now I know that the shared-loss 
agreements--Mr. Edwards, you spoke about them and I guess their 
intention, at least from what I am reading, is to soften the 
blow to the community.
    Mr. Bret Edwards. Yes, that is correct.
    Mr. Westmoreland. And I read in your testimony about--I 
guess it was your testimony, it did not have anybody's name on 
the front of it, but it talked about loss share, that they were 
open to modification and that you were willing to work with 
people and that the reason these shared-loss agreements came in 
was so the acquiring bank could go in and work with these 
different people to see if they could not save the loans; is 
that correct?
    Mr. Bret Edwards. Yes.
    Mr. Westmoreland. Okay, you need to get out more. And I 
hope you will stick around and listen to some of this testimony 
because that is not what happened. That may be what you all 
think is going on in Washington, but that is not what is 
happening here in our local communities, I can promise you 
that.
    You also mentioned, or somebody mentioned, that a large 
percentage--I guess it was you, sir--that a large percentage of 
the loans here were A&D and construction. And that is true. And 
I think Ms. Capito asked a question about how many--because of 
so many banks in Georgia, and we did have a large part of that. 
Did you ever take into consideration that because of maybe some 
type of a uniqueness, that somebody would need to come down 
here and look at it? And if that was recognized by the FDIC as 
being a problem, then you cannot manage all problems the same 
way? And if you recognize this, and I am sure it was much the 
same in Nevada where 40-something percent of their banks have 
closed, why wouldn't you come in here and look at maybe some 
special circumstances of the A&D and the construction loans?
    Mr. Spoth. As you know, we issued guidance from Washington 
about restructuring troubled real estate loans that was 
designed to reflect what was going on in Georgia, Florida, and 
some other States that have been mentioned here. We addressed 
how to restructure loans on the cash flow from the development 
or from the commercial property and to try and keep the 
borrower with that property.
    Mr. Westmoreland. How often did you inquire to how that 
process was going and how did you--when you looked at that 
process, how did you see it going?
    Mr. Spoth. We asked bankers and examiners whether they are 
able to follow the guidance. The particular guidance that I am 
talking about is about 19 pages long and has all kinds of 
examples in it. So we have asked people to go back and look at 
troubled real estate loans and see if the examiners--
    Mr. Westmoreland. But from your personal experience, what 
has been the result of going back and doing these things?
    Mr. Spoth. Bankers tell me that they are more comfortable, 
and importantly, examiners too tell us that they are more 
comfortable working on restructured loans than they would have 
otherwise been without the guidance.
    Mr. Westmoreland. You need to stick around too.
    Mr. Spoth. I will do that, sir.
    Mr. Westmoreland. Now let me just--
    Chairwoman Capito. Sure. We will do another round.
    Mr. Westmoreland. Okay, if I am going to get another round, 
I will yield back.
    Chairwoman Capito. Okay. Mr. Scott?
    Mr. Scott. Thank you very much, Madam Chairwoman.
    One of my favorite actors is Paul Newman and he made a 
wonderful picture called ``Cool Hand Luke'' and in there, there 
was this line that said, ``What we've got here is failure to 
communicate.'' And I think that--and I want to talk about that 
for a moment because we have Federal regulators in Washington, 
field examiners and then the banks. And they have not been on 
the same page. We have had complaints after complaints. And I 
think at the core of part of our problem here in Georgia has 
been just that. What have you all done to correct this, to 
address the concern that there has been a lack of communication 
between the Federal bank regulators in Washington and the 
examiners in the field? And in relationship to what they are 
doing on a consistent manner with the banks.
    Mr. Spoth. At the FDIC, one of the things that we did, 
having heard that, Congressman, is we informed our community 
bank advisory committee and had community bankers come to 
Washington and try to tell us their experience in their banks, 
in the field, and how it is with those they are representing, 
their peers. That has been very helpful; I have met with that 
committee every time they have been in Washington. That has 
probably been 7 or 8 times now they have come in.
    The other thing that we do--I talked about the commercial 
real estate loan restructuring guidance--is to have conference 
calls with bankers and invite them to participate. People like 
myself and the leadership that I work for participate on those 
calls with bankers and try to cut through the layers of 
communication that could break down somewhere.
    Mr. Scott. Let us just take one of those areas. We have 
come to the conclusion, I think you talked about the major 
cause, because I think we need to zero in on that, being that 
overleverage of bank foreclosures into the real estate and the 
construction area that caused a lot of what we have down here. 
So what have we moved or what are we going to put in place to 
make sure that does not happen again? Have we addressed that? 
Why didn't the examiners, why were they not able to communicate 
that as they examined the banks? Why were banks allowed to, if 
we knew that this would be a problem--some of them I think had 
70, more than 70 percent of their portfolios were in this. 
Wasn't that a red flag going up? Didn't somebody see that? If 
not, have we moved in to correct that, to put something in 
place, some kind of triggering mechanism, something that would 
prevent that?
    Mr. Spoth. I can take an initial stab at that. One of the 
things that we think about when we see that is to recall--and I 
referenced earlier--how strong the Georgia economy was, and for 
the Georgia banks, the high capital ratios that existed at that 
time, say in 2006 and into 2007, and the high earnings. All 
this was largely driven by real estate, which masked the levels 
of exposure that were going on, both to examiners, I think, and 
to the bankers. So we look at techniques and perhaps go back to 
our 2006 guidance and see if there is something that we could 
or should do different there. What we know is that it is not 
necessarily the level, although we have talked about it some 
here, it is not necessarily the level of construction and 
development loans; it is also the management of risk around the 
loans. So it is a two-part story, and it is complicated, but I 
think that some of the solution is to look at risk practices.
    Mr. Scott. Let me just ask one because here in Georgia--I 
want to bring one incident to illustrate, particularly some of 
the requirements on what is known as asset writedowns. Let us 
just take the situation with a bank that was called Buckhead 
Bank, and it was run by a friend of mine, Charlie Loudermilk, 
who was the chairman and talked to me about that, to see what 
we could do.
    Is there a consistent procedure in place for asset 
writedowns in terms of the amount of cash capital that bank has 
to go and raise and are there too restrictive requirements on 
where they can go or cannot go to raise that capital? Because I 
think that is at the core of a lot of the problems with why 
some of the banks went down. There were very strong, stringent 
requirements on certain standards that might not--that it seems 
to me could have been adjusted. I think that some of these 
banks really had no business failing if we were more on the 
case and were adapting procedures that fit tough economic times 
as opposed to just bringing down the hammer. And one of those 
is the asset writedowns. And if we are going to get a troubled 
bank to have to go and to raise capital, there ought to have 
been some elasticity there. I do not know the particulars, but 
I think there is so much you could get from shareholders, or 
non-shareholders, there had to be--could you address that?
    Mr. Spoth. I will be happy to touch on that. At the 
beginning, what we try to do when a bank gets in--
    Mr. Scott. Specifically, if you could refer to that case. I 
know somebody here dealt with the Buckhead case because if you 
did not and did not know about that, that is another part of 
the problem. Were you familiar with that case or the closing of 
that bank?
    Mr. Spoth. I am. I cannot recall right now the details of 
that bank. I would be happy to look into it and get back with 
you on the specifics of that case. I can talk generally about 
what we do when a bank's viability is threatened or when its 
closure is near because of its insolvency. I can talk about 
that kind of corrective program. I just cannot remember the 
story behind Buckhead at this moment.
    Mr. Scott. All right, before you leave, some of our banking 
friends come and tell us that they fear retaliation. Could each 
of you respond to that? What is that about? Why is there a fear 
among the bankers of retaliation just to come forward publicly? 
Where is this fear coming from and what is this retaliation?
    Mr. Barker. Congressman Scott, let me first address the 
comment itself, and I think that it is very understandable that 
examiners have considerable power, and each one of the 
regulatory agencies have considerable power over the 
institutions themselves. We have the opportunity to make 
recommendations to the board of directors, we have the 
opportunity to assess fines and penalties, to pursue 
enforcement actions. We have a great deal of authority over the 
institutions themselves.
    I think in recognizing that, there is concern about what 
will happen if there are disagreements or arguments over 
different opinions that are expressed during the course of an 
examination. But I can tell you in the strongest terms--and 
again, I operate in the Dallas office and supervise this 
region, that it has been emphasized a great deal that there is 
no retaliation that will take place in any of our supervisory 
activities. I am as concerned about that as I am anything else 
that we do. We have active involvement with the institutions 
themselves, with the bankers associations, I meet with the 
institutions, and we are very concerned about any kind of 
feedback or comments that would suggest any kind of 
retaliation.
    Mr. Scott. What would that retaliation be? How would any of 
our Federal regulators--each of you sitting there are 
regulators--what would be a retaliation? How would that happen? 
It is a part of the culture there, we hear it all the time, so 
we might as well get it out in the open so we can correct it, 
so we do not deal with it. What are some of the--could you 
describe an action that would be considered retaliation that 
our bankers would have to worry about, from an examiner?
    Mr. Barker. Again, I go back to concerns about what actions 
the regulators could pursue. For example, fines and penalties 
and violations and weaknesses could all be cited in an 
examination report. Again, we have a series of checks and 
balances that take place to make sure that does not happen. And 
again, I cannot emphasize enough that any kind of retaliation, 
it is a four-letter word, it is identified as something that we 
just will not allow to take place in any of the institutions.
    Chairwoman Capito. Would anybody else like to comment on 
that?
    Mr. Bertsch. I would just add on the question of 
retaliation, we take it very seriously too, and would not 
tolerate it. We have an ombudsman function in Washington that 
is separate and distinct from our supervisory function that can 
investigate any specific cases that people identify of 
retaliation. That ombudsman has the ability to investigate 
through the Reserve Banks and identify any cases that might 
rise to that and to take appropriate action if anything of that 
nature is identified. But as Gil said, and I know my other 
colleagues from the FDIC share this, we do not expect examiners 
to retaliate. We understand there are differences of opinion 
but we do not tolerate retaliation.
    Chairwoman Capito. Thank you. I am going to take the 
liberty of having another round. I am going to have one quick 
question.
    All three of you have mentioned guidance as a policy, 
guidance from Washington to try to spur lending. I know that 
guidance is different than regulation and this is maybe 
Washington bureaucratic speak, but it has great impact I think 
in terms of how it is carried forward. So I would ask you, how 
do you distinguish guidance from regulation, and then if 
guidance is a weaker form of regulation, more as an advisory 
opinion, how do you follow up with that in terms of your 
quality control to make sure it is consistent across all 
regions and all types of institutions and lending practices?
    So I will start with you, Mr. Bertsch.
    Mr. Bertsch. As I touched on in our testimony, we have done 
a number of things to try to look specifically at how the 
examiners are implementing the guidance. So one of the things 
we have to do is rely on our local reserve banks to monitor the 
work that the examiners are doing and take into account their 
knowledge of the local business market, their conversations 
with bankers, and make sure the examiners are taking a balanced 
approach to looking at loans.
    Beyond that, we have done specific testing to look at the 
particular area that seems to be raised most frequently, which 
is concerns about how we are treating commercial real estate 
loans. And so we took a look at a large sample of those loans 
across the country to see how our examiners were treating them, 
compared that to the guidance that we set out and make sure 
that the examiners were consistently following that.
    Chairwoman Capito. What did you find?
    Mr. Bertsch. We found that in our opinion, the examiners 
were carefully following that guidance. And in many instances 
were giving bankers reasonable and, for good reason, benefit of 
the doubt on loans that they reviewed when there were pending 
actions or there was additional collateral that was going to be 
offered, or things of that nature. So we conclude from that--
and we continue to test that--that the examiners are hearing 
the guidance and that they understand that we need to be 
careful to consider and listen to what the bankers have to say 
when we are making our classification determinations. And we 
think that the guidance is effective, regardless of the fact 
that it's not regulation, as you mentioned.
    Chairwoman Capito. Right. Mr. Barker?
    Mr. Barker. Madam Chairwoman, I guess the way I would 
respond to your comment is the difference between guidance and 
regulation, that specific point itself, because issuing 
guidance provides a lot of flexibility for the institutions to 
be able to take an approach and implement what the intentions 
and the objectives of the guidance actually is. So it is very 
much a principles-based rather than rules-based approach, which 
I think again allows the institutions to go ahead and adopt 
policies, develop business plans, and it provides them some 
flexibility in how they comply with the regulatory issuance 
that is out there. I think that is very important because 
banking is an innovative, creative process and we see that take 
place all the time and it is up to the experience of the 
examiners to make sure that guidance is being followed, that 
the risks are being identified and that the controls are in 
place to minimize that risk.
    Chairwoman Capito. Thank you. And then, anybody at the FDIC 
on that point?
    Mr. Spoth. I think I can probably comment for both of us 
there. The guidance does not have the force of law.
    Chairwoman Capito. Right.
    Mr. Spoth. It is a communication vehicle with the industry 
and our examiners, and during the tough times that we have 
here--particularly we are all talking about the same main three 
pieces of guidance--trying to convey a message to both the 
bankers and the examiners about what the expectations are. So 
we expect sound loans to be made.
    Chairwoman Capito. I expect we will hear from the second 
panel that in the three guidance areas maybe the guidance is, 
on the one hand, one thing, and then when the rubber meets the 
road, so to speak, it ends up converting into something else.
    I will just make a quick comment and then go to Mr. Bachus. 
When I hear bank failures and folks taking over assets, it is 
consolidation. We just went through too-big-to-fail in a big 
way in this country and certainly the community banks were not 
the problem. But I, as chairwoman of the Financial Institutions 
Subcommittee, am beginning to get very concerned about bank 
consolidation, because from what we are hearing, the 
institutions are getting larger and larger. And from a lessons-
learned aspect, I am not sure--I need to be assured that is the 
direction we need to go and that you all as regulators are 
overseeing this as a potential red flag.
    So I just put that out as a comment, a source of concern. I 
think most of my colleagues share this and certainly some of 
the controls that were put in place in Dodd-Frank, whether it 
is the FSOC or some other things to look at, kind of over the 
horizon, systemic risk areas, are still very unformed and, I 
don't know, they do not make me sleep all that great at night. 
And then when you see the markets just going crazy here, 
particularly with the financial institutions, it is a source of 
concern.
    Chairman Bachus?
    Chairman Bachus. Thank you.
    I would say this to the regulators, but also to the 
audience, it is very difficult here on Main Street, the 
environment, the demographics, the economy, the loss of jobs. 
It is also, I think, a very difficult time for regulators and 
they have many challenges there. You will hear sometimes as a 
Member of Congress conflicting information even from the 
bankers or from the borrowers. You talk to a borrower and 
sometimes he will say that the banks say the regulators don't 
want me to make that loan. And let me say this, it is not up to 
a Member of Congress to tell people or encourage people to make 
loans or not to make loans. That is certainly not our job, 
ethically. But when we have made inquiries as to just what is 
the situation here, a lot of times the bankers tell us that 
they do not want to make the loan and they actually do sort of 
shift that by saying--and it is an easy answer to say--we are 
afraid of the regulators. And that is often the case.
    I know many bankers will maybe tell you that is not the 
case, but I have had some of them who have said that is the 
case. Not that they intentionally do that, and maybe it is 
someone, a loan officer who is saying that, not someone in 
management.
    Mr. Barker, you, as a District Director, are in the banks 
quite often. And I think Mr. Westmoreland mentioned something--
Mr. Spoth--and Mr. Edward, you have been on the job since 
January--and you are actually in Washington and you supervise 
the District Directors, so they are going into the banks. But I 
think maybe Mr. Westmoreland has hit on something in that I 
think--I believe it could be beneficial to sometimes go with 
the District Directors or even the bank examiners and listen. 
Oftentimes, my staff will meet with constituents and then I 
will talk to constituents and the staff will think they are 
getting the message, but I may actually say, I think we can do 
something.
    I would actually encourage you to do that because we 
sometimes don't--at the Washington level, they say they are 
sending a message to the bank examiners, the bank examiners on 
the local level sometimes feel as if it is Washington, that if 
they do something, they may have a problem with Washington. And 
it is very difficult for us as Members of Congress or for 
bankers or for borrowers to know exactly if there is a problem 
or where there is a problem.
    I will close by saying that--and I know for many of the 
bankers here, this may not be a popular thing for me to say, 
but I am going to say it anyway, because I do not run in this 
district.
    [laughter]
    One of the bankers in my district who was the most critical 
of the bank regulators, vehemently critical, and was always 
calling with various examples of overreach, I had been told a 
year before by other bankers that that bank had done all sorts 
of imprudent lending and that there was no way they were going 
to pull out. And they were closed, at a considerable loss to 
the taxpayer and to some depositors who, during that period of 
time, came in and deposited money above what their protection 
rates were. And to the last day, I was being told that this 
bank was in great shape, by the management. But everyone else 
realized that was not the case.
    That is human nature to say that someone else caused your 
problem. The bottom line is the regulators may have made 
mistakes, but I do not think in many cases they forced the 
failure of banks. They may not have done everything that they 
could have, they may not have done a perfect job. And I worry 
going forward the level of regulation and the cost of 
regulation and Dodd-Frank is going to--the interchange fee on 
debit cards, of all things, which impacts community banks 
particularly--is going to be another hurdle for our community 
banks. And I know the Fed has been outspoken on that and very 
concerned about it, that it would be a problem.
    Credit cards were not addressed on the interchange fee. 
Those are the seven largest banks. So we have had--that 
provision that only dealt with debit cards is going to make 
the--it is not a level playing field between our community 
banks, regional and community banks, and our largest 
institutions.
    So I would just simply say to you I think more 
communication always helps. I appreciate the fact that the FDIC 
sent its top people from Washington. It was good that we had a 
District Director from the OCC because it is a slightly 
different point of view, and I think they were both good. But I 
would encourage you, with Mr. Westmoreland and Mr. Scott, to 
look at their legislation, offer comments to them, if you have 
a provision that you think is a problem. But if you can work 
with them on this, at least sit down and see if you can agree.
    I appreciate your attendance today and it is not--we are 
not one big happy family, we are never going to be, but we are 
all Americans, we are all concerned about the economy, we all 
want the financial system and the American people to prosper. 
So we are all on the same page, we all want the same goals. But 
as you will probably find out on this second panel, they do not 
consider you family. But they should not, because you are not 
there to--you have a duty you have to discharge. It is not 
always popular, but I do--as I appreciate the challenges with 
the bankers, I appreciate the challenges you have, too.
    I have no further questions.
    Chairwoman Capito. Thank you.
    Mr. Westmoreland?
    Mr. Westmoreland. Thank you. To the gentlemen from the 
FDIC, can you both confirm to me for the record that no one on 
the FDIC asked any Senator in the United States Senate to hold 
H.R. 2056?
    Mr. Spoth. May I take some liberty with that question, to 
offer our support. For one, we think it is the right thing to 
do, to have our Inspector General and anyone else look over the 
FDIC's operation. We support that initiative and are happy to 
work with it.
    Mr. Westmoreland. So if anybody told us that, they were 
mistaken?
    Mr. Spoth. I would not know about that.
    Mr. Westmoreland. All right. Mr. Barker, in your testimony, 
you said, ``Thus, a key part of our job is to work with bankers 
to ensure that they recognize and address problems at the 
earliest possible stage when remedial action is likely to be 
most effective. The simple truth is that seriously troubled 
banks cannot effectively meet the needs of their local 
communities.''
    And you testified or spoke that you had gone I think to 
three banks that eventually went. What prior steps had been 
done, what remedial actions had been taken to get them back on 
the road I guess to recovery. And how long back had those 
remedial actions been put in place before the failure?
    Mr. Barker. I think that in every single case where we have 
a bank failure, examiners are responsible for conducting 
examinations on a routine basis, based on the size of the 
institution. Once we identify problems at an institution--
    Mr. Westmoreland. But how many of those banks--had there 
been problems identified with those banks that you visited?
    Mr. Barker. Yes.
    Mr. Westmoreland. And how far back had those problems been 
identified?
    Mr. Barker. Varying degrees.
    Mr. Westmoreland. Okay. Because we have bankers telling us 
that the OCC comes in and they get an A+ on their report card 
and then the next report, they not only get an F, they are 
called everything but a felon.
    How often do you do examinations on banks?
    Mr. Barker. Depending on the size, either 12 or 18 months.
    Mr. Westmoreland. Okay, 12 or 18 months. So, one year, you 
make all A's and then the next year, you get F's, you are 
called everything but a felon and you make a D in conduct. Now 
somewhere, somebody missed those remedial steps I guess, 
because I don't know how it goes from an A+ to an F in 12 
months.
    Mr. Barker. Let me say a couple of things. One is that the 
uniqueness of the Georgia markets included, as was spoken 
before, the size of the concentrations in commercial real 
estate and I think what has not been spoken is the significant 
economic impact that hit at one particular time. In the past, 
it was a slow downturn or the economy slowed, but it was just a 
significant economic event that just completely shut down the 
markets in Georgia. So it happened very, very quickly.
    As part of our supervision, we not only examine banks once 
every 12 or 18 months, we have quarterly contacts with the 
institutions. And the purpose is to do those very things, to 
highlight trends in financial condition, to talk about new 
products and services--
    Mr. Westmoreland. I understand. And I am not trying to cut 
you off, but some of these loans that are now F's were A's. It 
is just hard for me to believe a loan goes downhill that fast, 
especially when it is a performing loan.
    But I want to get back to the FDIC because I know we are 
running out of time. How often do you take a performing loan 
with a failed bank, and when it comes into receivership of the 
FDIC, how does it become a non-performing loan?
    Mr. Bret Edwards. Are you talking a bank fails and the 
loan--
    Mr. Westmoreland. The FDIC took over as a receivership.
    Mr. Bret Edwards. Okay. If a performing loan goes into 
receivership, it would depend on where it gets managed 
obviously, but you are asking how it would become non-
performing?
    Mr. Westmoreland. No. What do you do with it?
    Mr. Bret Edwards. With a performing loan?
    Mr. Westmoreland. When a performing loan comes in.
    Mr. Bret Edwards. Sure. Again, we have tried to use the 
whole bank structure as much as possible, so the performing 
loan would be sold to the acquiring institution and become an 
asset of that institution.
    Mr. Westmoreland. The FDIC is the receivership--no?
    Mr. Bret Edwards. Okay. If there is no acquiring 
institution, then we would take that onto the receivership's 
books and we would manage it--either manage it ourselves or 
package it into a package to sell, or perhaps to put into a 
limited liability structure to have--
    Mr. Westmoreland. Okay. But the rules and regs that we are 
supposed to be, as the chairman said, at least applying 
consistency, if you go in and put a bank in receivership 
yourself, you work out these loans or at least you should be 
following your own guidelines to work out these loans, but 
isn't it true that most loans that the FDIC wants to modify, 
they want 50 percent of loan to value?
    Mr. Bret Edwards. I am not familiar with that requirement.
    Mr. Westmoreland. Okay, so that is not a requirement?
    Mr. Bret Edwards. No.
    Mr. Westmoreland. That it would be 50 percent. So you would 
be more than willing to help somebody with a loan that the FDIC 
had, to soften the blow, to do what you are encouraging other 
banks to do, to have shared-loss agreements, you would be 
willing to go in and do that?
    Mr. Bret Edwards. What I described earlier about our 
expectations on acquiring institutions when they take over 
these loans under a loss sharing agreement, we follow exactly 
the same standard. We are going to look at a performing--if a 
loan becomes non-performing, we are going to look at the 
alternative disposition strategies and we are going to follow 
the one that we believe is going to minimize the loss.
    Mr. Westmoreland. Okay. Let me follow up for just a minute 
here. With Rialto being a partner of the FDIC, Rialto is a 
group of people, I think out of Florida, that has partnered 
with the FDIC, correct? FDIC, 60 percent partner?
    Mr. Bret Edwards. That is correct.
    Mr. Westmoreland. They are 40 percent. They purchased $3.2 
billion worth of loans I believe from the FDIC--and you are a 
partner, right?
    Mr. Bret Edwards. Yes.
    Mr. Westmoreland. --for about 40 cents on the dollar.
    Mr. Bret Edwards. Okay, yes.
    Mr. Westmoreland. And I think the actual money they put in 
cash, 300 and some million dollars, was about 8 percent of 
that, right?
    Mr. Bret Edwards. Okay, yes.
    Mr. Westmoreland. And you are a partner with them?
    Mr. Bret Edwards. Right.
    Mr. Westmoreland. It is zero percent interest for 7 years, 
is that correct?
    Mr. Bret Edwards. I believe that's right.
    Mr. Westmoreland. So the taxpayers--let me get this 
straight, we are a 60 percent partner and we took on another 
entity, an LLC. They got the stuff with just cash money for 
about 8 percent down, right? Would you do that for anybody else 
out in the audience there who wanted to do that?
    Mr. Bret Edwards. When we put those LLC structures 
together, we put--
    Mr. Westmoreland. No, I am just asking you, would you do 
that with anybody else out there?
    Mr. Bret Edwards. Anybody who is qualified to bid on those 
kind of structures. When we put those--
    Mr. Westmoreland. So if they had 8 percent of what the deal 
was, you would take them on as a 40 percent partner?
    Mr. Bret Edwards. As long as it is the highest bid for 
the--
    Mr. Westmoreland. I am sorry?
    Mr. Bret Edwards. When we put those deals together, we take 
those assets, put them together in a pool, we bid them out 
competitively.
    Mr. Westmoreland. Okay, so your 40 percent partner was just 
lucky to get the bid?
    Mr. Bret Edwards. We think we do an excellent job of 
marketing these things--
    Mr. Westmoreland. I know, but I am just asking you.
    Mr. Bret Edwards. Yes.
    Mr. Westmoreland. Because it sounds like a sweetheart deal, 
and all these people may want to get involved with you to be 
able to do that.
    [applause]
    Mr. Westmoreland. And let me ask you this--
    Chairman Bachus. It was bid, though.
    Mr. Bret Edwards. Correct, that is absolutely right.
    Mr. Westmoreland. I don't care. With all due respect, Mr. 
Chairman.
    Chairman Bachus. I know.
    Mr. Westmoreland. When you go and buy other people's loans 
that are supposed to be in the constant consistency of what we 
are doing, that is supposed to soften the effect on the 
community and work them out, now they are auctioning them off. 
And let me go one step further. Typically, you would foreclose 
on a property if it was a non-performing loan?
    Mr. Bret Edwards. If that is the best disposition 
alternative after we have done the analysis.
    Mr. Westmoreland. Okay. Would the best dispositional thing 
to do be to go immediately to court and file for a judgment and 
let the borrower continue to accrue interest and let the 
borrower be responsible for the taxes, rather than foreclosing 
and taking the property over and putting it back out and 
selling it. Would it be the FDIC's decision, since you are a 60 
percent partner, to go to court first and go after these people 
personally, because we are wanting to do a consistency of the 
regulations? So it is the FDIC's position that their managing 
partner go to court first, sue these people personally, try to 
get control of the property and even though they have control 
of the property, the borrower is still responsible for the 
taxes and the interest? Is that what I am hearing from you?
    Mr. Bret Edwards. It sounds like this is a fact-specific 
situation. I would be happy to talk to you about that.
    Mr. Westmoreland. You know the situation, I mean it is 
Rialto.
    Mr. Bret Edwards. Right. I will tell you that the LLC 
structure has served the FDIC well. We take the loans--
    Mr. Westmoreland. You are a 60 percent partner.
    Mr. Bret Edwards. --we put them out for bid.
    Mr. Westmoreland. You put them out for bid and then do you 
tell them to go straight to court? I am not going to argue with 
you here, but we are going to look further into this because I 
am telling you, there is something that is not right with it.
    [applause]
    Mr. Westmoreland. And we are going to continue to pursue 
it.
    Chairwoman Capito. Mr. Scott?
    Chairman Bachus. Mr. Edwards may want some time to explain. 
I know he was kind of--
    Chairwoman Capito. Mr. Edwards, did you have another 
response?
    Mr. Bret Edwards. Again, let me just explain. Our LLC 
program is essentially designed to keep as many of the assets 
in the private sector, just like the shared-loss program is. If 
we are incapable of getting a loss share deal or a whole bank 
deal first of all and then a shared-loss deal, we then take 
those assets back onto the books of the receivership. Rather 
than manage those assets ourselves with our own employees, we 
put these assets into an LLC structure. These equity partners 
bid competitively to get a piece of that deal and then they 
have their own capital at risk. Again, they are putting up 
substantial amounts of capital, these are not--these are some 
of the most poor quality assets we have and they are incented 
to follow the same disposition strategies that we would or our 
loss share partners would. It is their money at risk, they are 
going to follow the disposition strategy that has the highest 
net present value for that asset.
    Chairwoman Capito. Thank you.
    Mr. Scott?
    Mr. Scott. Thank you.
    Let me ask you, are there any banks now currently, in your 
opinion, or your understanding, that are in trouble or close to 
closing now that are under review?
    Mr. Spoth. Yes.
    Mr. Scott. And how many would that be?
    Mr. Spoth. The problem bank list has 888 on it, it has been 
trending down some. Not nearly all of those do we expect would 
fail. There is a subset of those, there is a possibility that 
some of those could fail, not all of them will.
    Mr. Scott. But relative just to Georgia, how many?
    Mr. Spoth. I do not have that information.
    Mr. Scott. But there are some?
    Mr. Spoth. There are banks struggling in Georgia, yes.
    Mr. Scott. And if you had to put your hand on one basic 
area that was a causal effect, what would that be? Why?
    Mr. Spoth. This is still the workout of the overhang in the 
real estate markets.
    Mr. Scott. One of the problems that we have that I would 
like for you to address is that we get to hear from our friends 
in the banking community when we ask them to lend more. We 
faced it most recently, a lot of closing of car dealerships, 
for example, and their biggest problem was we would go to the 
bank, we could not get the money, we would go to the bank and 
when we get to the bank, the bank would say, we are not 
lending, we cannot lend because of the overly restrictive 
standards and application of regulations that the FDIC, the 
Office of the Comptroller, the Fed, all the regulators, 
examiners, are putting on us. Do you agree with that? Is that a 
fact?
    Mr. Spoth. No. I do not doubt that it is a fact that you 
are hearing it, but I do not think that it is a fact that it 
could be occurring that way.
    Mr. Scott. You mean you do not feel that what you are doing 
is hindering the banks from lending money?
    Mr. Spoth. That is correct.
    Mr. Scott. Why would they say that it is then? That is what 
I mean; there is this disconnect. We cannot get the banks to 
lend because they say you are putting so much pressure on with 
these restrictions that they cannot lend and then you say these 
restrictions can. So something has to give, we have to get the 
money out into these small businesses.
    Mr. Spoth. I think this may go back to the chairman's point 
about the guidance and the like. This is why, along with the 
other regulators, we would put out guidance that we are 
encouraging loans to creditworthy borrowers, and that goes 
right to, if it is a car dealership, do they have the ability 
to cash flow whatever kind of loan that they are applying for. 
We are happy to see those kinds of credits made.
    Mr. Scott. But let me just ask you, what are these 
restrictive standards? What would they be? What are the bankers 
talking about? I do not think they are just making this up. 
There has to be something that you are doing. What is it--I am 
trying to get at a point, not sort of he said-she said, but 
what in your opinion are they talking about in terms of these 
restrictive standards?
    Mr. Spoth. I will try to work with you on that. It is a 
communication piece, I think. The only banks that are 
restricted on the amount of lending that they can do, unless it 
would be State law, there are limits on how much you can lend 
to any borrower, but setting that aside, the only restrictions 
that are on banks are banks that are in serious trouble, and we 
usually have a formal or informal agreement with them about how 
they plan to work out their problems. Even then, you would not 
usually see the kind of restrictions that you may be hearing 
about.
    Mr. Scott. Let me ask one for you to respond to. There have 
been complaints about the consistency of procedures used by 
examiners for appraising collateral values. Is that, in your 
opinion, legitimate? Is there a problem of not being consistent 
in applying those procedures?
    Mr. Spoth. Our procedures at the FDIC, and I think the 
other regulators as well, are to review the appraisals that the 
bank itself has gotten. So you would not be expecting, and you 
would not see, a bank examiner conducting appraisals. We may 
ask about an appraisal or an evaluation that a bank has in its 
files, but--
    Mr. Scott. And so you do not see, there is no legitimacy to 
the concern that there is inconsistency in the procedures?
    Mr. Spoth. I don't think there is inconsistency in the 
procedures, but I do hear the concern. It is certainly true 
that there is a concern about that. We put out guidance 
specifically on this issue. I think it was in December of 2010 
that we reissued appraisal guidance.
    Mr. Scott. What about the factors that the examiners 
consider when assessing capital adequacies?
    Mr. Spoth. The assessment of capital adequacy is a case-
specific situation, according to the risk profile of the 
institution, unless they are not meeting the absolute minimum 
standards of the regulation. So there is a minimum standard, as 
you know, and there may be a requirement above that, depending 
on the risk profile.
    Mr. Scott. What about the impact of the cease and desist 
orders?
    Mr. Spoth. This is one that we do hear a lot about when 
banks are in troubled condition. We try to work with the bank 
management to reach a bilateral agreement, which would include, 
if we agree, that an increase in capital is necessary, and we 
try to agree with the bank on what that number should be. And 
we think what that leads to is a consistency of approach. If 
the bank has to talk to their existing shareholders or new 
shareholders, what exactly is the road map forward. So if we 
can agree on an order, which we do substantially all of the 
time, everybody knows what the road map is to avert that 
failure.
    Mr. Scott. Okay. And so what would you say, because the 
bankers are going to come up here and speak in the next panel, 
I would like to give you an opportunity, what would you say--we 
have asked questions here, and there are two thoughts of 
opinion here. There are areas of disagreement. I think you saw 
and heard some of the reaction from the audience with their 
applause in making a point, but there seems to be some 
difference here. You are the examiners, you are the regulators, 
they are the banks. What would you say to the bankers, what do 
they need to do that they are not doing, and where are some of 
the miscommunications that are taking place, because there 
obviously is miscommunication here? How would you address that?
    Mr. Spoth. I would just stipulate that these are the very 
toughest conversations that a regulator and a banker can have, 
if the bank is in a seriously threatened condition. Investors 
could lose money, borrowers, communities could potentially lose 
their local community bank. These are the very toughest 
conversations you can have and you would expect that informed 
people on both sides of the table would be trying to come to a 
solution. And I believe that is the case substantially all of 
the time. So it is getting around to just what you are asking, 
what needs to be done. Usually if capital has been depleted, it 
will need to be replaced at some level so that the institution 
has time to work out its issues.
    Mr. Scott. Yes?
    Mr. Barker. I would like to make a couple of comments. In 
my experience over the years, we have difficult times like 
this, but there are institutions that not only survive, but 
those that thrive. And there are two elements in those two 
individual cases. One is a management team that recognizes the 
issues and is prepared to address them. The second issue is 
having access to capital in order to have them last through the 
difficult periods. The access to capital is really a key.
    But I think what I would pass along to the bankers who are 
coming up next is as examiners, our window into the bank, our 
window into their borrowers is through the credit files and 
through the discussions of management. So the best they can do 
is to help us understand what the situation is, help us to see 
the things that they see, have that dialogue, and the 
communication is critically important to us making accurate 
assessments.
    Mr. Scott. Finally, I don't want to take up too much time, 
but Congressman Westmoreland and I are working on this bill and 
in the legislative process, you are always looking for 
vehicles. And while the paramount purpose of this bill is to 
really get a good study and get some answers to questions, and 
we can also use this--as a result of this hearing, there may be 
some things that come about where we can improve the situation 
and that is why I really asked those questions about some of 
the points and some of the concerns that have been raised. And 
I would hope that you all would have an open mind here that as 
we get back, the bill gets over to the Senate, that we might be 
able to add one or two items into this bill that can be 
executed to help with one or two of these problems. Would you 
all be amenable to that?
    Mr. Spoth. Yes.
    Mr. Scott. Okay, thank you.
    Chairwoman Capito. All right, thank you. I want to thank 
the first panel. I think we have had a very good discussion. I 
want to thank you for traveling to Georgia and I want to thank 
you for--
    Mr. Westmoreland. May I make one comment? It will take 5 
seconds.
    Chairwoman Capito. He said 5 seconds.
    Mr. Westmoreland. Mr. Edwards, could you just get me a list 
of every entity that the FDIC is in partnerships with?
    Mr. Bret Edwards. Absolutely.
    Mr. Westmoreland. Thank you.
    Mr. Bret Edwards. Absolutely.
    Chairwoman Capito. And also, I would like to echo the 
chairman's comments in terms of thanking you for your service 
in the financial sector, I know sometimes it is not easy work, 
and we appreciate that. You have certainly had lengthy service 
there.
    My final comment before I call the second panel up would be 
that one of the big solutions to a lot of the issues that we 
have heard today is a roaring and vibrant economy. And this is 
something that we are all four here tasked with, but so is 
everybody in this audience. So I look forward to those days in 
other such hearings.
    Thank you all very much. I will dismiss the first panel and 
I would like to call up our second panel of witnesses.
    We will go ahead and get started. If everyone could take 
your seat quickly, we will go ahead and start the second panel. 
They have been very patiently waiting. I know the chairman will 
be back in the room--there he is.
    Chairman Bachus. Madam Chairwoman, Mac Collins, who was a 
colleague of mine, we came into Congress in 1992 together--Mac, 
would you stand up? You represented this district?
    Mr. Collins. I had the pleasure of representing this 
district for 12 years. It is in good hands now with Lynn 
Westmoreland. We appreciate you all being here; this is an 
issue that really needs to be addressed. There are a lot of 
problems around the country with our community banking system 
and I do think a lot of it has come from the regulators. In 
fact, I know it has. And I appreciate you all being here, and I 
appreciate them being here and facing up to the issue, too.
    You all take care and have a good day. I hate to beg off, 
but I have to go to Forsyth for a conference.
    Chairwoman Capito. Thank you, Mac.
    Our colleague, Mr. Scott, probably will be coming in here 
shortly. So with your permission, I am going to go ahead and 
start. I will introduce each panelist individually for the 
purpose of giving a 5-minute opening statement and then we will 
get to the question portion.
    Our first witness is Mr. Chuck Copeland, who is the CEO of 
the First National Bank of Griffin. Welcome.

   STATEMENT OF CHUCK COPELAND, CEO, FIRST NATIONAL BANK OF 
                            GRIFFIN

    Mr. Copeland. Committee Chairman Bachus, Subcommittee 
Chairwoman Capito, and Representative Westmoreland and 
Representative Scott in absentia, welcome to my congressional 
district and thank you for affording me the opportunity to 
provide my comments during these times which have been so 
detrimental to our communities.
    First National Bank of Griffin is a 78-year old community 
bank chartered in Griffin, Georgia, in 1933, literally rising 
from the ashes of the 1929 financial collapse, to serve the 
citizens and merchants of our community. For all of these 78 
years, service to and access to credit for our citizens and 
merchants have been our principal tenets of business.
    Being located less than 50 miles from downtown Atlanta, our 
community has served as a long-time bedroom community for those 
commuting daily into Atlanta for work. As such, as the metro 
Atlanta economy prospered in the 1990s and early 2000s, the 
demand for housing in our banking markets blossomed. Being a 
community bank, we responded to this by providing both 
construction and development financing to many of the builders 
and developers. We provided responsible conventional long-term 
mortgage financing to many of the home buyers through our 
longstanding, direct-delegated authority through Freddie Mac. 
We did not knowingly participate in the subprime game of hybrid 
loan structures and perilously relaxed mortgage underwriting 
standards and we often questioned the soundness and 
appropriateness of those activities. What we failed to 
anticipate in our risk management practices at that time was 
the degree to which this subprime activity was propping up the 
unprecedented demand for new housing our market was 
experiencing. We also failed to understand the degree to which 
misrepresentation and manipulation were masking huge 
fundamental flaws in the mortgage securitization market.
    We monitored our concentration risk in the areas of 
residential construction and development, comparing our levels 
against the regulatory guidelines, and against the levels of 
our market peers. Due to our 7 decades of retained earnings and 
careful and prudent past dividend policies, our higher than 
peer capital levels helped mitigate our risks, and our 
concentrations in these loans as a percentage of capital 
generally came in at the lower end of our market peers, which 
was not substantially out of line with regulatory guidance. 
Regardless of these circumstances, no amount of forward 
analysis or stress testing anticipated the depth and length of 
the real estate housing collapse we were about to face in the 
closing months of 2007.
    We were early to recognize our problems, mainly due to the 
fact that we had used loan structures which were more stringent 
than many of our peers. We commonly required hard equity and 
monthly payment of interest on our construction lines. In 
addition, it was the exception where we permitted borrowers to 
draw funded interest reserve to carry their development loans. 
Because of these practices, in many cases, we knew our problems 
the first time a monthly payment was missed as opposed to not 
discovering the depth of the problem until loan maturity. In 
spite of these efforts, the pace and magnitude of the 
residential collapse quickly overwhelmed our early warning 
devices.
    We are a core-funded community bank. As we entered the 
recessionary cycle, we enjoyed the number one deposit market 
share position in our home market and had no wholesale or 
brokered deposit funding on our balance sheet. In spite of the 
significant credit stresses we have endured over the past 4 
years, we continue to demonstrate an underlying core earnings 
stream. In other words, once the cloak of this real estate 
collapse is finally lifted, our bank can not only survive, but 
prosper for another 78 years.
    I recognize that the title of this hearing is, ``Potential 
Mixed Messages.'' My frustration is not so much one of mixed 
messages, but one of changing messages. As this cycle began, we 
sensed a reaction from our regulator of supportive cooperation. 
They knew our bank. Many of the field examiners had been in our 
bank through multiple exam cycles for as long as 25 years. The 
general message coming from examiner comments in 2008 was one 
of acknowledging that the same core fundamentals which had 
sustained our bank for decades were still evident, but that we 
had become victims of an unprecedented real estate market 
collapse. The beginning of the shifting message became evident 
when we received our written reports of examination, and many 
times the narrative seemed more harsh than the discussions. 
Unfortunately, it is the written narrative which becomes the 
written record, and the document by which we will all be judged 
in history. Did we have a role in setting ourselves up to 
become victims? No doubt. But did we recklessly pursue growth 
and earnings at all cost with no regard to the other elements 
of our mission? Never.
    Fast forward to subsequent exam cycles and we have found 
the field examiners less willing to disclose conclusions and 
very guarded in acknowledging progress in those areas where we 
had been performing well. These are many times the same 
examiners we have worked with for years. We understand that 
this is not a personal affront; it is simply this environment 
of second-guessing and weariness in which we are all operating. 
But as the field examiners have become less comfortable in 
making casual assessments of progress or acknowledgement of 
bright spots within our banks, such as our extreme customer 
loyalty and core funding, the written reports of examination 
have taken on a clear pattern of excessive criticism and legal 
edification. So much so that one can find nearly contradictory 
statements within the same paragraph or section of a current 
report.
    We understand our shortcomings, and you can rest assured 
that we are working diligently to improve our banks in the 
areas we can control and influence. But, the inflammatory and 
demoralizing tone found in many of the examination reports only 
tends to send us clamoring for cover. We are trying to improve 
our banks and preserve our chances of survival, not because of 
heightened rhetoric or threat of repercussion, but because for 
most of us, our banks are a substantial part of our being. We 
are the ones leading our community's economic development 
activities and trying to attract jobs for our citizens. We 
carry the daily weight of knowing the importance of a paycheck 
to the roughly 100 people we employ in our bank. This is bigger 
than pride, deflection of responsibility, or self-preservation.
    I have observed some of the testimony of the regulators and 
the academic experts in earlier hearings on the subject of 
regulatory practices or behavior. A recurring theme seemed to 
be the position that forbearance in regulation is inappropriate 
and would only lead to greater potential losses to the fund. I 
would argue that forbearance is a necessary and logical part of 
any healing process. And that is exactly what is taking place 
in our banks; we are attempting to heal our banks, our local 
economies, and where salvageable, our borrowers. That is why I 
support the flexibility being offered in some of the proposed 
legislation such as smoothing out the effects of loan and asset 
impairments resulting from declining real estate values. The 
current methods of write-down being employed today have the 
potential to wipe out all of the capital in our banks with no 
chance of living to see the eventual real estate market 
recovery. Unfortunately, by that point, our community will have 
been stripped of a valued commodity. My bank and its resources 
will have been extinguished and the beneficiary will be a 
faceless, opportunist investor with no ties to my community.
    Chairwoman Capito. Mr. Copeland, could you kind of 
summarize the end there? Sorry. I'm trying to keep it in a 
reasonable timeframe.
    Mr. Copeland. Certainly.
    In spite of the imperfections and the public's general 
distaste for it, I was an early proponent of the TARP program. 
Unfortunately, our bank was not allowed to participate in that. 
This has created a system of two different classes of banks: 
those that can afford to and are motivated to dump problem 
assets at substantial discounts; and those of us who are 
clinging to our remaining capital like a shipwreck survivor 
clinging to debris.
    Theoretically, had we received the TARP funding which the 
funding formula indicated we were eligible for, our current 
leverage ratio would still be at a respectable 8.25 percent and 
our total risk-based capital at 15 percent.
    And with that theoretical capital level, I am sure it would 
be much easier for my bank to attract additional shareholder 
investment to bring us into compliance with the regulatory 
order my bank entered into with the OCC almost 2 years ago. The 
capital cushion would add badly needed flexibility as we 
consider loan requests from borrowers and we would find 
ourselves in a position to operate our bank for the benefit of 
our community, its employees, and the broader economy, as 
opposed to the regulatory paralysis which we suffer from today.
    Cycles eventually come to an end. We have endured this one 
for 4 years. We realize that much of what has been done cannot 
be changed or its effect reversed. We kindly ask that through 
forbearance and flexibility, our regulators give us time and 
support us as we try to lead our communities to recovery.
    Thank you for your time.
    [The prepared statement of Mr. Copeland can be found on 
page 89 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Michael Rossetti, who is president 
of Ravin Homes. Welcome.

    STATEMENT OF V. MICHAEL ROSSETTI, PRESIDENT, RAVIN HOMES

    Mr. Rossetti. Thank you, Chairwoman Capito. I would like to 
welcome you and Chairman Bachus to Georgia. And Lynn 
Westmoreland, David Scott, it is good to see you guys again. I 
sincerely appreciate the honor and the opportunity to testify 
before you on this subject. It is my opinion that our 
Representatives genuinely want to foster and promote a healthy 
banking environment so that citizens and businesses can 
prosper.
    I have been directly involved in the banking business as a 
director since 1999. And my primary business, as Chairwoman 
Capito mentioned, is homebuilding. I have owned and operated 
Ravin Homes for 30 years.
    In your letter inviting me to testify, the first two bullet 
points request comments on the policies and procedures of the 
FDIC and whether they are being applied uniformly across the 
country.
    Although I have read about certain banks getting favorable 
treatment from regulators, I can say that my experience has 
generally been that they have acted reasonably with our bank. 
The problem is with the regulations and the lack of common 
business sense used in the interpretation of these regulations. 
We are being regulated so heavily that we cannot function as a 
facilitator in the community.
    When Sarbanes-Oxley was implemented, our bank decided to go 
private so we would be exempt from the duplication of 
regulatory reporting. We were already performing the regulatory 
requirements of the FDIC. The costs and manpower required to do 
redundant reporting under Sarbanes would have been crippling to 
our institution.
    Now, we have Dodd Frank to contend with. This a 2000+ page 
bill that will have 10 times the regulations attached to it 
after bureaucrats get through with writing all the rules. I see 
more of an issue with the amount of regulations rather than the 
regulators. We are being regulated to death in all of our 
personal and business lives.
    Your next point of interest concerns regional economic 
conditions and adjusting exam standards.
    In my banking world, as well as most banks in Georgia, real 
estate loans, which we call AD&C loans, were and still are a 
large part of our portfolios. In accumulating these large 
portfolios, the bank's customers were simply supplying the 
product that the Federal Government, through Fannie Mae and 
Freddie Mac, were giving away money to buy.
    The current huge overhang that this created in all levels 
of housing development is going to take years to work down. If 
the regulators were able to adjust to this fact and be less 
onerous on banks to write down loans, I believe that the 
liquidation of assets would be more orderly and more lucrative 
and create considerably less stress on our banks. I will have 
more on this when I discuss loss share.
    The second to last point of discussion concerns safe and 
sound operation of banks while promoting economic growth. In my 
mind, there are two entities that need to be considered in the 
economic growth equation for this topic--the banks and their 
customers. At the present time, we are restricted from doing 
any new AD&C lending, no matter how secure it is, due to the 
concentration limitations imposed by the regulators. We cannot 
take advantage of doing a good loan and the customer cannot 
find a bank to do that same loan. Both get hurt and the economy 
loses jobs and suffers.
    My grandfather told me when I was younger that there were 
only two ways to get out of debt: stop spending; and start 
making. If banks are going to survive, we need to make a 
profit. And the only way that banks make money is to lend it. 
Right now, we are prevented from doing that.
    Banks that are in this position, basically community banks, 
are completely defensive in this arena. As of this date, we do 
not lend unless it benefits the bank in the disposal of 
foreclosed property. New loans to new or existing customers do 
not exist at our bank.
    I would respectfully request that you investigate H.R. 
1755, the Home Construction Lending Regulatory Improvement Act. 
It addresses this issue and several other regulatory issues 
that are very germane to our discussions here today.
    Now we have the last point in your letter, and my 
favorite--winding down failed institutions and the liquidation 
of assets by the acquiring institutions, which we will call 
loss share.
    This shared-loss agreement allows banks to operate 
completely outside of normal banking policies because they are 
guaranteed to make money, no matter what they sell the asset 
for. The same banks operate completely differently--and I have 
found this directly and heard this from other people--they 
operate completely differently under a loan that was originated 
in their original bank. To add insult to injury to our bank and 
the community, they will dump the assets acquired at a rock-
bottom price, thereby destroying local property values. In my 
opinion, loss share has done more to destroy property values 
than any other economic factor in this downturn.
    Concerning troubled and failed institutions, from what I 
have seen, the FDIC declares that anywhere from 25 to 35 
percent of the failed institution's assets are declared as a 
loss when they close that bank.
    Using our bank as an example, we are a $380 million bank, 
the Bank of Georgia. If we were closed, the loss to the FDIC 
Insurance Fund would be between $95 million and $133 million. 
If our bank could borrow, or be supplied through TARP like 
Chuck mentioned, $6 million to $10 million to use as capital, 
we would return to being well-capitalized and we would be 
profitable. In addition, we would be able to pay this back over 
a period of time in the future.
    My point is that many banks could survive with a minimal--
compared to closing the bank--capital injection. This is what 
should have been done with TARP funds instead of forcing them 
on healthy institutions and telling them that they were too big 
to fail.
    I also want to mention--it is not in my testimony, but Lynn 
brought up this Rialto/FDIC partnership. In my opinion, these 
public/private partnerships are terribly--they are perverted. 
That just leaves the door open for a private company to make a 
ton of money. And from what I have heard recently over the past 
2 weeks of investigating this, that Rialto/FDIC partnership is 
bad news. And I would highly recommend that you investigate 
that.
    It is my sincere hope that my testimony today has given you 
a constructive view of these items of interest. Again, I would 
like to thank you for your time today and I look forward to 
answering any questions that you may have.
    [The prepared statement of Mr. Rossetti can be found on 
page 142 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Jim Edwards, the CEO of United 
Bank. Welcome.

           STATEMENT OF JIM EDWARDS, CEO UNITED BANK

    Mr. Jim Edwards. Good morning. Chairman Bachus, 
Subcommittee Chairwoman Capito, Representative Lynn 
Westmoreland, Representative Scott, I am delighted to be here 
today.
    My name is Jim Edwards, and I am CEO of United Bank which 
is based in Zebulon, Georgia. I appreciate the opportunity to 
speak to you today concerning the state of banking in Georgia 
and our bank's experience working with the FDIC's shared-loss 
agreements.
    I want to tell you a little bit about our bank. United 
Bank's corporate office is located 50 miles south of Atlanta 
and 40 miles east of where we are today in Newnan. I joined 
United Bank in 1993 and I became CEO in 2002. I am proud to say 
that I represent the third generation of my family to work with 
United Bank and the banks from which it was created. I am 
active in both State and national bank trade associations and 
currently serve as chair-elect of the GBA or the Georgia 
Bankers Association, and also serve as a member of the American 
Bankers Association Community Bankers Council.
    United Bank traces its roots back to the founding of its 
predecessor, The Bank of Zebulon, in 1905. Over 100 years 
later, more than 90 percent of our company's stock continues to 
be owned by our employees and our directors who live in and 
care very deeply about the local communities that we serve. We 
operate 21 banking offices in 11 contiguous counties ranging 
from 35 to 65 miles southwest, south and east of Atlanta. Our 
total assets are just over $1 billion and we offer traditional 
banking services along with mortgage, trust and investment 
products. We are pleased that we have been able to grow our 
employee base through this economic downturn and we now provide 
jobs and benefits to nearly 400 people and their families.
    The economic downturn which Georgia and our entire Nation 
have endured over the last several years has created the most 
challenging operating environment for banks that I have ever 
experienced. United Bank has historically maintained above-
average capital levels and worked to make sure that our loan 
portfolio was well-diversified among different types of 
lending. This conservative philosophy has served our company 
well during the past century of operations. This same cautious 
approach encouraged our board to make the decision to apply for 
the Capital Purchase Program funds, more commonly known now as 
TARP, from the U.S. Treasury in late 2008. After a rigorous 
application process, we were approved for a little over $14 
million in funding. Even though we were already well-
capitalized at the time, the new capital has provided an 
additional buffer in what has certainly been a worsening 
economy, and has allowed us to maintain our employment and 
continue to make loans to qualified borrowers in the 
communities that we serve.
    Since accepting this funding in 2009, United Bank has paid 
just over $2.6 million in quarterly interest payments at an 
approximate rate of 8 percent to the Treasury. Our current 
plans are to begin repaying our TARP funding in May of 2012, 
assuming the economy begins to improve by then.
    United Bank has acquired 3 failed banks from the FDIC 
during the last 3 years. We purchased the deposits in all these 
transactions and loans in two of the transactions. In the early 
stages of the recession, the FDIC liquidated failed banks 
primarily by auctioning off the deposits to another financial 
institution and then retaining the loans themselves for 
disposition at a later time.
    In December of 2008, United Bank purchased the deposits of 
First Georgia Community Bank in Jackson, Georgia, using this 
``clean bank'' type transaction without a shared-loss 
agreement. A group of FDIC contractors stayed onsite and 
managed the failed bank's loan portfolio for over a year, but 
they had little authority to make decisions or to offer options 
to work with customers experiencing financial difficulties. 
Ultimately, the FDIC bundled all the failed bank's loans into 
several groups and bulk sold them through an internet-based 
auction. The winning bidders were mostly located several States 
away; therefore, they knew very little about the local 
community. And as a result, they had minimal incentive, in my 
opinion, to try to take any long-term approaches to working 
with troubled borrowers.
    In August of 2009, United Bank entered into its first 
shared-loss agreement with the FDIC for the purchase of 
deposits and loans of First Coweta Bank here in Newnan. In 
contrast to our earlier acquisition in Jackson, we are fully 
responsible for managing this loan portfolio. In return, the 
FDIC reimburses us for essentially 80 percent of the credit 
losses we experience in the loan portfolio. This reimbursement 
is effective for the first 5 years for commercial loans and for 
10 years for one-to-four family residential loans. The shared-
loss agreement does not reimburse United Bank, however, for the 
expenses associated with funding these loans, nor does it cover 
the considerable overhead needed to manage this loan portfolio 
and remain in compliance with what are very extensive 
requirements involved with the shared-loss agreement.
    In the fall of last year, the FDIC informed us that First 
National Bank in my home town of Barnesville, Georgia, soon 
would fail and they asked us to consider submitting a bid, 
along with other banks. Although we were competitors, this was 
shocking and very sad news. Our employees in Barnesville had 
always enjoyed a very good relationship with First National's 
employees and we historically had worked together to improve 
the local community for decades. Our board ultimately decided 
not to submit a bid for First National due to our recent growth 
and due to the fact that we felt like the economy was 
continuing to turn down. However, shortly after the bid 
deadline, the FDIC contacted us and explained that they had 
received no qualifying bids from any financial institutions and 
that they were preparing to close the doors of First National, 
terminate all the employees, and simply send checks to all the 
depositors. They also communicated that unfortunately it 
appeared some customers might exceed deposit coverage limits 
and so there could be depositor losses from some of the First 
National Bank accounts. After considering how devastating this 
would be to one of our most important communities, our 
management team and board decided to submit a bid to prevent 
the bank payout. And I am pleased to share with you today that 
we were able to hire a majority of First National Bank's 
employees and continue banking services without any disruption 
to customers in Barnesville.
    Through these experiences, I have seen the advantages of 
how a loss share arrangement works, as compared to the FDIC's 
earlier practice of using outside contractors to manage a 
failed bank's loan portfolio. When a local community bank, such 
as United Bank, manages a loan portfolio, in my opinion, it has 
a very strong vested interest in trying to take a long-term 
approach and work with customers to overcome their financial 
challenges. The primary reason for this is so that we can make 
the borrower a life-long bank customer. The secondary reason, 
and you heard the regulators talk about this earlier today, is 
that because the bank participates in any future loan loss, we 
do have skin in the game and we work hard to try to minimize 
any future losses. We have worked very hard here in Newnan and 
in Barnesville to find solutions for struggling loan customers 
and have offered modifications and forbearance agreements. And 
we have had a number of successes with this type of approach.
    Under our agreement with the FDIC, United Bank is 
essentially required to manage the loss share loan portfolio in 
essentially the same manner as we handle our non-loss share 
portfolio. The FDIC has encouraged us to work with customers 
whenever possible. The FDIC also audits our bank regularly to 
make sure that we remain in compliance with all the elements of 
the shared-loss agreement. This enhanced scrutiny has 
necessitated us having to hire a number of new employees, just 
to make sure that we are in compliance with the shared-loss 
agreement.
    No, there is absolutely nothing good about any bank 
failure. We all know that. Customers, bankers, businesses, and 
in effect, entire communities, suffer in a variety of ways. 
However, as I mentioned, in our experience, the current system 
of utilizing a shared-loss agreement is preferable to the 
others used earlier in this economic cycle by the FDIC. In 
general, the resolution process works to keep the transition 
organized, it provides maximum depositor protection, encourages 
confidence in the safety of deposits at a critical time, and it 
minimizes more broad-based market disruptions.
    Thank you again for the opportunity to share our 
perspective and our experience in working with the FDIC in 
these shared-loss agreements, and I look forward to answering 
your questions.
    [The prepared statement of Mr. Jim Edwards can be found on 
page 113 of the appendix.]
    Chairwoman Capito. Thank you, Mr. Edwards.
    And our final witness is Mr. Gary Fox, former CEO, Bartow 
County Bank. Welcome, Mr. Fox.

    STATEMENT OF GARY L. FOX, FORMER CEO, BARTOW COUNTY BANK

    Mr. Fox. Thank you. Chairwoman Capito and members of the 
committee, thank you for inviting me to participate in your 
hearing today. My name is Gary Fox and I was in the banking 
business in Georgia from January 1981 until April 2011, when 
our bank was closed by the Georgia Department of Banking & 
Finance and sold with a shared-loss agreement to Hamilton State 
Bank. I started my career as a bank examiner with the State of 
Georgia and began working at the Bartow County Bank in May of 
1983. I am also a certified public accountant and am now in 
private practice.
    I divided my remarks into three categories. First, how we 
got here, to give you some historical perspective. Second, what 
made it worse, where I will mention issues such as appraisal 
policies, market disruptions caused by unprecedented government 
involvement, and the application of certain regulatory and 
accounting policies. And third, I will mention some real 
concerns I have with how the loss share is playing out in the 
market.
    Included in my testimony are slides that I will be 
referring to that were furnished to me by John Hunt of Smart 
Numbers, which would be a good resource for you going forward.
    I saw a lot of changes in our industry in 30 years and had 
the pleasure to meet and know a lot of great community bankers 
during that time. I have a depth of knowledge about the 
community banking industry in Georgia that few other people 
have.
    The biggest change that I saw over the years, other than 
regulatory, was the ease of entry. When I first got into the 
business, it was quite difficult to get a bank charter. In 
fact, it was quite a chore to even get a branch application 
approved. At that time, you had to convince the chartering 
authority of convenience and need. Sometime in the mid-1990s, 
that went out the window and it seemed to me the only 
requirement became whether or not you had enough initial 
capital to meet the chartering authority's requirement. As a 
result, we had an overabundance of banks. Many banks relied 
heavily on brokered deposits since there really was not a need 
for the bank in that particular community in the first place. 
It was also a reason why so many banks did out-of-market 
lending and participation lending since there was not enough 
demand in the community they operated in. On top of that, in 
1996, Georgia passed statewide branching. Previously, Georgia 
had been a State that only allowed a bank to operate in the 
county in which it was chartered unless it formed a bank 
holding company and entered a new market by buying another bank 
in a whole bank transaction. So as a result, many of the banks 
in markets that were not as robust branched into the metro 
Atlanta area to take advance of metro Atlanta's growth. This 
only compounded the problem. After all, it only takes a couple 
of folks polluting the pool to ruin the swimming for everyone.
    Another thing that got us here was prompt corrective 
action, which was put into law in 1991 as a result of the S&L 
crisis. While in theory, it sounded reasonable to mandate FDIC 
to take progressively punitive action against a bank as its 
initial capital falls towards 2 percent, in this environment, 
it was and is a bank killer. It immediately put you in a death 
spiral that you could not escape. Capital dried up, liquidity 
dried up, customers lost confidence, employees left, and 
regulators no longer were allowed to exercise judgment, as they 
were required to follow a set of draconian guidelines.
    And you cannot talk about how we got here without 
mentioning two government programs that have created market 
disruptions--the Troubled Asset Relief Program and the FDIC 
selling failed banks with shared-loss agreements given to the 
acquiring bank.
    Most banks in Georgia that have failed have been appraised 
out of business. To give a specific example of the appraisal 
problem, in the metro Atlanta area, historically the cost of a 
lot is 20 percent of the overall cost of a home. That means if 
you had a new home that cost $200,000, the lot cost would be 
$40,000. Today, the cost of a lot is 5 percent of the overall 
cost of a home, meaning that in the same $200,000 home, that 
lot cost is now $10,000. We have gone from a cost norm of 5-to-
1 to an abnormal TARP and loss share induced 20-to-1. This is 
visually demonstrated by slide 13, which is part of the set of 
slides that I have included in my testimony.
    There is another slide, number 20, that shows real estate 
asset disposals by TARP and loss share banks. The size of the 
yellow dot represents the number of lots liquidated, and they 
were all sold at less than $10,000 per lot. Unless you were one 
of the fortunate ones who received the government assistance, 
you had no chance to avoid significant charges against your 
capital due to undue influence of government money in the 
marketplace.
    Another example specific to my community was a subdivision 
where the lots had sold in the $90,000 to $120,000 range in 
2007. The loan amount was around $43,000 per lot, which at the 
time seemed to be a safe margin. Most recently, those lots were 
sold for $9,500 apiece by a loss share bank. That is a decline 
of 89 percent at the minimum. This was a fully developed 
subdivision in a highly desirable area with a first class 
amenities package.
    Additionally, these types of appraisal-driven declines 
permeate throughout the local economy. You would think that 
what it costs to create something would have some relevance to 
its value, but not in today's world. Under new appraisal 
standards, many appraisers will tell you that cost is not 
relevant. All that matters is the market approach, and to a 
lesser extent, the income approach. Therefore, since the market 
approach is the most heavily favored approach and you have 
federally-funded asset disposal by TARP and loss share banks, 
we have an incredible disruption in our real estate markets 
here in metro Atlanta and Georgia in general.
    Think about how this affects the general public. Consumers 
cannot refinance their homes to a lower payment because their 
home will not appraise. The municipalities that rely on real 
estate taxes can no longer fund schools or police and fire 
protection. And to make matters worse, many bankers are telling 
me that new appraisals are coming in 40 percent less than last 
year.
    In Georgia, until recently, building and building-related 
businesses had made up 20 to 25 percent of our economy. 
Referring back to the Smart Numbers slides, notice slide number 
15, which shows permits issued since 1996. The norm appears to 
be 3,500 to 4,000 per year. The current number is around 500, 
which is a drop of about 86 percent. In Georgia, we have had an 
industry that represented 20 to 25 percent of our economy not 
just slow down, but literally cease to exist.
    Another side that demonstrates the same point is slide 
number 3. Normally, new homes make up about 50 percent of the 
home sales, but most recently, they represent less than 10 
percent of that total. The decline is not only a result of lack 
of inventory from lack of funding, but it is also because of 
the undue influence of TARP and loss share money in the real 
estate market. If you take a look at slide number 8, you will 
see that the average new home in the first quarter of this year 
sold for around $225,000 while the average resale was $97,000, 
primarily due to foreclosures. A lot of asset devaluation has 
to do with a regulatory system trying to flush out the overall 
system as quickly as possible. As a result, the economy in 
general is being significantly hindered.
    A couple of other accounting-related issues of great 
importance are loan loss reserves and the deferred tax asset. 
Historically, banks use the experience method, called FAS-5, to 
fund their loss reserve. In May of 1993, an additional loss 
measure called FAS-114 was put into place, which I will not 
discuss today. Under the experience method, banks looked back 
at their average 5-year loan losses and set aside an amount 
that would cover those same losses as if they were going to 
happen again. In the 5-year look back, some years were better 
than others and the reserve balanced out. Over the last few 
years, banks have been required to shorten their look-back 
period to anywhere from 2 quarters to 5 quarters. This 
basically has the effect of capturing your worst historical 
loss periods and having to fund your loss reserve as if it were 
going to happen again. This has a direct effect on reducing 
capital, since only part of your loss reserve is allowed to be 
counted toward risk-based capital, and none of it counts 
towards tangible equity, which is the ultimate measure under 
prompt corrective action.
    Also of importance is the deferred tax asset. The deferred 
tax asset is a balance sheet account that is the result of 
timing differences between financial accounting and tax 
accounting. A deferred tax asset is a benefit you stand to gain 
in the future and in our current environment, this is primarily 
a loss carryforward. So if you had a couple of years of net 
losses, those losses would carry forward to reduce future tax 
liability when you have net income. Unfortunately, regulatory 
requirements state that you must disallow the amount of your 
deferred tax asset that you cannot demonstrate you can recoup 
in net income within the upcoming 12 months. When the entire 
amount becomes disallowed, it must be subtracted from tangible 
equity. In this environment, a 12-month look forward for the 
deferred tax asset should be reconsidered and a longer look put 
in place.
    In my home county, Bartow County, there are three loss 
share banks. The fact that there are so many loss share banks 
in this area has only exacerbated the asset value problem. It 
is clear to me that loss share banks stand to make more money 
by forcing the issue rather than working with the customer. In 
Georgia, community banks generally do balloon notes on 
commercial properties. This is done as an interest rate risk 
management tool. So at the end of 18, 24, 36 months, the entire 
balance of the loan is due. The commercial loss share part of 
the acquiring bank's agreement, which is 4.15B, is for 5 years. 
I fear that as the fifth year anniversary of the shared-loss 
agreements comes closer, rather than losing the protection of 
the loss share, many of these loss share banks will pursue 
judgments and foreclose so as to maximize financial gains, 
regardless of the borrower's past performance or capacity to 
pay.
    Another loss share issue is home equity lines of credit. 
While they generally fall within the provisions of the single 
family shared-loss agreement, which is 4.15A, which has a 10-
year duration, they are specifically separated from the 
mandatory loss mitigation provisions required for single family 
loans. Instead, they fall within the other shared loss loans 
category, which simply requires the acquiring bank to try to 
mitigate loss consistent with its own policies. Since this 
product became popular in the early 2000s and originally had a 
15-year maturity, later a 10-year maturity, many will be coming 
due in the next 4 to 8 years. What could easily happen is the 
loss share bank will get an updated appraisal, which will 
probably be valued down and then it will have to mitigate loss 
consistent with its own policies. Basically, this means there 
will be a whole lot more pressure on an already stressed 
consumer. And since there is no incentive to allow those loans 
to get outside of the loss share period, we could see another 
round of judgments and foreclosures. As a result, I think we 
will be mired in this real estate mess for quite a long time.
    Another problem I see with the loss share is it does not 
allow the loss share bank any judgment in its collection 
practices. Several months ago, one of these loss share banks in 
our community filed suit against a borrower. This particular 
borrower had had a debilitating stroke and would never be able 
to work again, and had lost everything. In prior years, the 
bank would have written the loan off and gone on down the road. 
I called someone I knew who worked at the loss share bank and 
asked, ``Considering the circumstances, why are you suing this 
person?'' He simply replied, ``That is the only way we can 
collect on the shared-loss agreement.'' I cannot imagine that 
is our government's intent.
    In closing, I also want to point out that the regulators I 
dealt with at all levels were both courteous and professional. 
I do not believe they take any joy in closing banks. I also 
want to point out that, particularly during the prompt 
corrective action process, I was told many times by the 
regulators that their hands were tied, they had no choice but 
to follow the requirements of prompt corrective action. 
Therefore, it is clear to me it is not an issue of regulators; 
it is an issue of regulations. So if this committee truly wants 
to make a positive change, it is going to have to come on a 
legislative level, not a regulatory level, to deal with these 
particular issues.
    Again, I want to thank you for inviting me to be part of 
this hearing and I hope that something positive comes from it.
    [The prepared statement of Mr. Fox can be found on page 116 
of the appendix.]
    Chairwoman Capito. Thank you.
    I want to just ask a quick question, and then a follow up, 
and then we will move on.
    Mr. Copeland, each one of you, will you tell me who your 
regulators are?
    Mr. Copeland. The Office of the Comptroller of the 
Currency.
    Mr. Rossetti. FDIC.
    Mr. Jim Edwards. State-chartered bank, also regulated by 
the FDIC.
    Chairwoman Capito. And you were?
    Mr. Fox. State and FDIC.
    Chairwoman Capito. FDIC, okay. Now, you have made your 
statements and they are all very, very good. But you had the 
benefit of being the second panel, so you also heard the 
regulators. What, in your mind, Mr. Copeland--and Mr. Scott 
talked about this a lot in the first panel, the sort of talking 
past each other, lack of communication--if there was something 
glaring that came out of some of the statements the regulators 
made that did not fit with what you see in practice in your 
bank, what would that be?
    Mr. Copeland. I was not at great disagreement with any of 
the statements made by the regulators. However, because this is 
not a personal issue, I do not believe--
    Chairwoman Capito. Right.
    Mr. Copeland. --there are no personal attacks involved. But 
I will say we have seen a clear difference in the tone of 
particularly the written reports of exams that we have 
received, as we have moved further out, that risk compendium in 
the eyes of our regulator. Whereas the initial reports of 
examination that we got had a very clear tone of understanding 
with regard to what got us here in this unforeseen catastrophic 
collapse, I believe it was Mr. Barker, my own regulator, who 
talked about this was not a steady slowing market, but 
literally we fell off the cliff. And what we have seen is a 
change in those reports, with an understanding that is what got 
us here and this is still a competent management team, for 
example, running this bank. And we do see positive aspects to 
this bank with regard to liquidity for funding and so forth. 
You see a change in tone in the reports of examination that 
clearly show what I would describe as legal edification where 
you are seeing verbiage come into these reports that is 
designed to bring it into step with prompt corrective action 
and other regulatory tools that are out there. And that is not 
for our benefit, I feel. It is for the benefit of being able to 
look back and kind of self-justify why particular actions may 
have been taken with the bank or might be taken in the future. 
So that is a tough thing to articulate and it should not come 
across as, for lack of a better word, whining, ``they are 
picking on me on the playground'' sort of thing. So we try to 
be careful as we say those things, because again, I do not 
believe it is personal.
    Chairwoman Capito. Right. Mr. Rossetti, do you have a 
comment?
    Mr. Rossetti. Yes, ma'am. There are two things. The first 
is when the regulators come in to regulate us, one of the first 
questions that the directors ask is what is the regulator like, 
what is the personality, how are they going to be on us. And 
that should not be a concern if they are dealing equally with 
all of the regulations. But a lot of the time it comes down to 
personality and that is something that I think the guys up in 
Washington do not understand, that it does depend a lot on who 
the regulator is and what they are like as to how that exam is 
going to come out.
    The second thing is their misunderstanding I believe of the 
loss share and how effective it is. I think you need to look at 
the two types of banks out there--a community bank under the 
loss share who has a stake in that community is going to 
administer the loss share differently than a large bank where 
you are just a number. And it has been my feelings with those 
large banks that they are very onerous and very stiff with 
their dealings with the loss share. They want that out of the 
bank, they do not care if it is performing, non-performing, 
whatever. They want it out of that bank and they want to get 
their money off the loss share. So those two things.
    Chairwoman Capito. Thank you. Mr. Edwards?
    Mr. Jim Edwards. Being a State-chartered bank, we are 
regulated one year--we will have the State Department of 
Banking & Finance in one year and the FDIC will come in the 
following year. And we have not--we are now due, although I 
probably should not remind my regulators of this, but I am sure 
we will have an FDIC exam before long. I hope I do not say 
anything today that causes that to be any sooner.
    But in terms of what they said, I think we have found 
certainly maybe a more challenging time with regulators but I 
think we all have to understand the backdrop here, how 
difficult these economic times are. The way you could structure 
something maybe in better times is not the way you can do it 
today unfortunately. And I look forward to those days when 
things will be better.
    I think in our discussions with regulators, obviously there 
are new requirements that come out, but we have felt like there 
has at least been a dialogue with them about that. And 
certainly I do not know a banker working today who believes or 
agrees with the regulators about everything they say. But I 
think in general terms, we have felt that they are trying to 
work through this situation too, in most cases.
    Chairwoman Capito. Mr. Fox?
    Mr. Fox. I think the loss share is having a far greater 
effect on local communities than maybe what they feel like 
right here. And it is a difference. There are some banks, while 
they may be locally chartered in the State of Georgia, they are 
funded by huge dollars from Wall Street or wherever, by venture 
capitalists. And those guys did not get into banking because 
they want to make 2 percent on assets, I promise.
    Chairwoman Capito. Thank you.
    Chairman Bachus?
    Chairman Bachus. Thank you.
    I want to commend all you gentlemen for the tone of your 
testimony and for the specificity. I think you have actually 
given us some real meat.
    Mr. Fox, I especially appreciate you being here. As a 
former banker, you could just walk away, but you are still 
obviously concerned about your colleagues and the business, and 
I think that speaks well of your character.
    Mr. Fox. Thank you.
    Chairman Bachus. I commend you for that.
    We mentioned shared-loss agreements, that keeps coming up. 
I think there is a problem there and I think it is something 
that needs to be looked at again. I think particularly--not 
particularly, but also when you have participation agreements, 
it can be a problem for those institutions.
    One thing that came up that I do not think we talked about 
on the first panel was writing down a performing loan, which at 
least two of you mentioned. We have often used the words 
``paper profit'' or ``paper loss'' where you write down 
performing loans and you have to raise capital and then an 
institution has restrictions or challenges because of, not 
actual losses but just the write downs of performing loans. And 
I think that is particularly frustrating and bears more 
watching.
    So I appreciate what you said about the prompt corrective 
action, that it may be the regulation, it may not be the 
regulators in those cases. They are following the law. And then 
that becomes our duty to review.
    And finally, Dodd Frank--2,400 pages--and I can tell you 
the regulators appreciate that you are concerned about them 
because they are pretty much struggling with it on a daily 
basis, they are overwhelmed by that regulation. So the 
regulators are even overwhelmed by the regulations. And when it 
gets to that point, you know you have a problem.
    I know one Georgian, Newt Gingrich, has actually said we 
need to repeal Dodd-Frank.
    We seriously need to take a strong look at it, I will tell 
you that. We are going to have a hearing on that in October, as 
to how the economy is going to swallow that massive 
undertaking.
    I will yield the balance of my time to Mr. Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    Before we close, I want to thank Mr. Don Mixon for allowing 
us to use this Performing Arts Center. It is a beautiful 
building. Thank you for allowing us to use the facility.
    And I also want to thank Chief Deputy Mr. Riggs for being 
here today and for the whole staff of the Newnan Police 
Department for being here and providing the security. So thank 
you all for what you do.
    Let me say just for the benefit of maybe everybody in the 
audience, I think most of you are familiar, but to some of 
these gentlemen who have great careers with the FDIC and the 
OCC and with the Federal Reserve, and I want to thank you all 
for your 30+ years of service or whatever you have been there. 
But you need to talk to some of these guys on a regular basis, 
some of these guys who are out there actually making the loans. 
Not your regulators, but talk to some of the people making the 
loans, talk to some of the people who are being punished by 
some of your regulations. And believe it or not, until the 
construction business comes back, our unemployment is going to 
stay high and this economy is not going to get going again. 
That is just a fact.
    Now let me say, what happened is a lot of these TARP banks, 
and we had some come into our communities that had gotten a lot 
of money and they fire sold, they did public auctions and sold 
these properties. And that brought the value down. So then some 
of our community banks were demanded to write down these loans 
immediately. Is that not true? And so they wrote down the loans 
immediately and had to have more--a loss of I guess reserve, 
grow their capital, were told to reduce their real estate 
portfolios in many cases.
    Then after that wave, we had the shared-loss agreements. 
Now Jim Edwards--if everybody who came into a community was 
like Jim Edwards, especially down in Barnesville and the 
relationship he had with that bank across the street, we would 
not have a problem. But when you have banks coming in here from 
California--and I am not picking on them--or Arkansas or 
others--I know we had testimony that said that these other 
banks were 10 banks adjoining Georgia. That is not true. So 
they do not know the community and so with their loss share, I 
think as Mr. Fox pointed out, the quicker they flushed these 
things, the better off they were.
    So we had another round with our community banks. And now 
we have communities that do not even have a community bank. And 
why people who have been regulating for 30+ years at the FDIC 
and the OCC could not see that this ball was going downhill, it 
was going downhill. We were losing thousands of jobs, 
generational wealth was being sucked out of our communities. 
People were losing their investments. We were losing our 
community banks, pillars of the community lost everything they 
had. Why could we not recognize that and see if we could not 
come in to see a Chuck Copeland or a Michael Rossetti or Jim 
Edwards or Mr. Fox and say, what we might need is some advice 
on how to do this because I have been in Washington for 30 
years?
    Is what I have described basically what happened to our 
economy, especially here in the Third Congressional District?
    Mr. Copeland. There is no doubt, it is the massive 
devaluation of real estate that has impacted all of our banks. 
And there are many reasons for that.
    Mr. Westmoreland. Right. And Mr. Fox, you mentioned that we 
do not need to do anything with the regulators, we need to do 
something with the regulation. I could not agree with you more. 
But say you do something legislatively, what would you propose 
that we could do legislatively that would help?
    Mr. Fox. It seems to me--and this is a double-edged sword, 
probably the reason we have prompt corrective action is you all 
wanted to take judgment away from the regulators. I think they 
need to be given some amount of judgment. And of course, if 
they are given that judgment, they need to use it wisely. 
Because when you look at the way real estate values have 
collapsed in Georgia, a non-assisted community bank, it is 
going to be a struggle. If this does not correct itself within 
the next 4 or 5 years, I do not know what is going to be left. 
But we cannot survive such an asset devaluation. And I think 
you would just have to give these banks some time through some 
kind of regulatory--I mean legislative--leeway for them to 
have.
    Mr. Westmoreland. So how about if there was a 5-year period 
to write down some of these loans, that some of them are even 
performing, where people are paying their interest, they are 
meeting their takedown schedules, and they are still being made 
to write these loans down because somebody is saying that it 
will not ever be worth that much money or they cannot pay it. 
Would it be of any assistance if there was some room to where 
they would write this down for a certain period of time, maybe 
even go back 24 months and go forward say 36 months, or 
whatever, if they were still in business, to be able to adjust 
some of these loans?
    Mr. Fox. Sure, it would be helpful, yes. I think that 
approach may have been tried back in the S&L days, and that has 
been brought up. I know another banker, Chris Maddox, brought 
it up to the FDIC.
    Mr. Westmoreland. Chuck, would that have hurt you?
    Mr. Copeland. Oh, there is no doubt it could make a 
difference. I do think there is this whole issue of 
transparency though and someone being able to pick up a call 
report or a financial statement and truly be able to assess the 
condition of a bank that is using some of these smoothing 
techniques with regard to funding writedowns, but I would think 
that that could be handled through memorandums to call reports 
or whatever, as a way to capture how much a bank does have in 
this pool of asset writedowns that it is accreting onto its 
books, and a process for how you re-evaluate values there and 
you adjust that pool, so that someone can pick up my call 
report and know exactly what sort of hangover effects I am 
still dealing with from the real estate meltdown versus say 
Jim's bank, who might be in a different situation.
    Mr. Westmoreland. You would be glad to work with any of 
these folks to give them an idea, wouldn't you?
    Mr. Copeland. Oh, no doubt about it. And you have to cut 
through some of the rhetoric too, because when you talk about 
writedowns on performing loans, I think there is a bit too much 
anecdotal jargon getting thrown in there. And for example, I 
know our experience with our regulator, I cannot say I have 
ever experienced having to write down a performing loan. But 
there is a point at which the regulator--
    Mr. Westmoreland. Even if the appraisal had come back for 
half the price of the loan?
    Mr. Copeland. Again, there is a difference between being 
forced by a regulator to write it down and having to reserve. 
The nuance in that, though, is the effect on my capital is the 
same. I have had to remove it from earnings and either put it 
into my loan loss reserve as a specific earmark against that 
credit or I have had to take the writedown. So the impact on my 
capital ratio is the same.
    I think we have to remove some of this rhetoric and 
anecdote from some of this if we are going to get to real 
solutions.
    Mr. Westmoreland. I will go ahead and close because I know 
we are running out of time. But let me just thank all of you 
for coming and thank all of you for doing this. I would hate 
for the FDIC to get the same reputation as the IRS.
    Chairman Bachus. I think you have your own time now.
    Mr. Westmoreland. Oh, I do.
    Chairman Bachus. You can start the timer again.
    Mr. Westmoreland. That is Ellen, and she has just given me 
five more--I will take just a couple more minutes then. I know 
lunch is getting near.
    But it is amazing that the FDIC when they come in and 
actually be the receiver does not want to work with a lot of 
these people. I have had a number of them call and tell me that 
they had loans that they offered to buy or whatever and then 
they were put up for auction. And then, they are sued 
personally by a partner with the FDIC. That just does not sit 
well with me. In a non-recourse loan for 7 years, interest 
free, there is something wrong with that. Really and truly, 
there is something wrong with that. When we put out banks and 
we suck this money out of the community and we are in business. 
It would be a little bit different if this company, Rialto, was 
not--I think most of them are from a home building company and 
I think 5,100 of the 5,500 loans were actually residential 
loans. So there is just something weird with that. But I know 
there are a lot of new partners for the FDIC out there right 
now just waiting to put together their money and call them and 
say, look, we want to be in business.
    But thank you all very much for coming and I hope we all 
learned something today. I hope we will take it back to 
Washington--Chairman Bachus, Chairwoman Capito, and Congressman 
Scott--so that we can write some legislation that will help out 
here in the real world. Maybe not in Washington, but out here 
in the real world with people who sit across the desk from 
these folks who have to make a decision on whether to loan 
money or not.
    I do think we need to look at some of those regulations 
that Mr. Fox mentioned about having to sue somebody to be able 
to get your loss share part of it. So there are a lot of 
different things that we can look at. I know that Chairman 
Bachus has been great about looking at this, about having the 
hearings and I want to push forward with it.
    So with that, I will yield back the balance of my time. And 
again, I thank everybody for coming.
    Chairwoman Capito. Thank you.
    Mr. Scott?
    Mr. Scott. Thank you.
    I would just like to start off by commending each of you 
for excellent testimony, very thorough, very informative, and 
providing us with a lot of good information.
    I would like for my line of questioning to kind of zero in 
on this area of conflicting communications--the banks and the 
regulators. I think you all were probably here when I asked the 
regulators if they felt that their standards were so 
restrictive that it was inhibiting lending, and their basic 
response was that they did not feel it was.
    And I would like for you to address that. Do you feel so? 
If I remember, I think, Mr. Copeland, you said they were 
sending shifting messages and the examiners were making 
contradictory statements that sent you clamoring for cover.
    Mr. Copeland. Correct.
    Mr. Scott. That is certainly a stark difference from what 
the regulators said.
    Mr. Copeland. I can tell you there is a marked difference 
between how we feel and how we maneuver through our normal day-
to-day in the management of our banks during times when we do 
not feel the cloak of the regulator. And that cloak of the 
regulatory being most present during periods of exam, where you 
truly do feel almost paralyzed in terms of dealing with the 
day-to-day running of your bank.
    With regard to the contradiction, there are two things 
there that I would point to. One is--and this is somewhat of a 
selfish statement--one of the tenets of the CAMELS rating is 
the management component. We have the same management team and 
same board of directors in our bank that was there in the 
period of the early 2000s when our bank was generating record 
earnings and receiving nothing but the highest of regard from 
our regulator.
    My reports of examination today have a very indictful tone 
towards management and the board of the bank. But it is the 
very same people.
    Mr. Scott. Did you say indictful?
    Mr. Copeland. Indictful, yes. So it tends to put you in a 
very guarded position. The other thing with regard to 
contradiction; again, in our report of examination, we never 
had any significant reliance upon wholesale funding, brokered 
deposits or those things, we were always a core funded 
community bank. And that gets a brief acknowledgement in a 
passage in a report, but then it will go on to say in the same 
paragraph, ``but due to the bank's high level of non-performing 
assets and its elevated risk profile, liquidity is 
insufficient'' and it may even go in some passage to take it a 
step further and say, ``and this constitutes an unsafe and 
unsound banking practice.'' Back to prompt corrective action. 
The trump card that has to be there before they can play prompt 
corrective action is they need to be able to assert these 
unsafe and unsound banking practices.
    Mr. Scott. So with the regulators here in the audience 
listening to what you have to say, what two major recommended 
changes would you like to see in their procedures?
    Mr. Copeland. I would like to see patience exerted in how 
verbiage and terminology finds its way into the report of 
examination. I want a report of examination that 20 years from 
now my 5-year old child would not be embarrassed and ashamed to 
read about his dad.
    Mr. Scott. Okay.
    Mr. Copeland. In simple terms.
    Mr. Scott. Right.
    Mr. Copeland. But in addition to this patience, 
forbearance. And an example of that would be we are under a 
public regulatory order, so I am not disclosing anything that 
is not out there in the world to see, which requires that we 
achieve and maintain 9 percent tier 1 leverage and 13 percent 
total risk-based capital. We were in excess of those levels by 
and away during good times because that is the way we ran our 
bank. We understand the core principle of capital being your 
cushion against bad things that can happen in a risk-associated 
industry. Bad things happened to us, our capital has eroded. We 
need forbearance to work with our regulator on how we get back 
to that 9 and 13 over a reasonable period of time. There is no 
capital out there to a community bank in a community of my 
demographics, 13 percent unemployment, 30-odd percent of my 
population not being high school graduates, housing prices in 
the tank. There is no--outside of perhaps maybe with the beauty 
of a nice FDIC 80/20 loss share, some venture capitalist from 
New York who might like to take a bite out of our bank.
    So we do not disavow the importance of the capital, but to 
have an expectation and a demeanor in how that expectation is 
communicated that we be able to restore those capital levels to 
that 9 and 13 in an environment that just for all practical 
purposes and common sensical analysis will not support that.
    Mr. Scott. Okay.
    Mr. Copeland. The tools are already there with regard to 
what is defined as adequately capitalized. The trigger is there 
within prompt corrective action with regard to the forced 
dissolution of a bank. We understand the need to abide by those 
and will continue to do our dead level best to do it. But it is 
indeed crippling to realize that is not enough.
    Mr. Scott. Okay. They are sitting out there, they are 
listening. So we hope that they hear what you are saying and we 
can move to correct.
    But going a little bit further, of course, lending--we have 
been touching upon that, that is a great concern, it is really 
at the core of this field hearing, the whole issue, of course 
lending is the key. Banks cannot make money if they do not 
lend, and we cannot recover our economy if they are not 
lending.
    Mr. Rossetti, you came right out in your statement and said 
in fact it is preventing you from lending. How is that?
    Mr. Rossetti. Our lending guidelines for AD&C lending, the 
FDIC has written them down to 100 percent of capital. We are at 
450 percent of capital. We will not get down there in 30 years.
    Mr. Scott. Repeat that again.
    Mr. Rossetti. They have put such an onerous guideline on us 
to lend money for AD&C lending, acquisition, development and 
construction lending, that--they put a guideline on us that we 
cannot achieve. And we are just prevented from bringing in any 
new business to lend money to people doing AD&C lending.
    Mr. Scott. And what would you recommend that formula be?
    Mr. Rossetti. It gets back to what Chuck says, common 
sense, if you get a loan, say a builder comes in, he has a 
presale home to build on somebody else's lot and the customer 
that he is building for is completely qualified. It is a 
commonsense loan. We cannot do that. We could not lend money in 
that situation because it is outside of our guideline.
    Mr. Scott. And have you presented this particular issue to 
the examiner or to the regulator in any way?
    Mr. Rossetti. I am sure it has been discussed.
    Mr. Scott. But have you yourself discussed it?
    Mr. Rossetti. Not myself, no. No, I have not, but I know 
what the guidelines are and I know the revised guidelines that 
they put us under to do that kind of lending, and it is just 
going to be impossible for us to get there for a long period of 
time.
    Mr. Scott. And you had some things to say about the shared-
loss agreement, which you felt was the most onerous. And I 
think it might have been you, Mr. Edwards, I wonder if you 
might--you said that, if I understand you correctly, that there 
is a requirement that you hire new people in order to be in 
compliance with the shared-loss agreement.
    Mr. Jim Edwards. Yes, sir. They did not require that we 
hire new people per se in the contract, they just--we entered 
into a contract and it has a number of obligations and we have 
to make sure that we comply with all different things in the 
contract.
    Mr. Scott. And when you say ``they,'' you are talking about 
the FDIC?
    Mr. Jim Edwards. Yes.
    Mr. Scott. Okay. Do you believe--do each of you believe 
that there ought to be some restructuring in Washington 
regarding the regulation of our financial institutions to fit 
these economic times, that would be different? And if so, what 
would those be?
    Mr. Copeland. I think without a doubt. And honestly, it had 
not occurred to me until Mr. Fox's testimony just what a hurdle 
prompt corrective action creates for the regulator, and that 
perhaps it is not so much the regulator, but the regulation. 
And I understand the 2 percent capital minimum and the time in 
which that came from, but I would assert that there are banks 
out there that have a strong enough core element to their DNA 
that they could survive with negative capital. Now, you could 
not survive indefinitely, but you could certainly survive at 
less than a 2 percent capital level.
    Mr. Scott. Okay. And just a final question. If you could 
zero in on and categorize--we have discussed many issues here, 
what would be the single deterrent to banks lending more now? 
What would that be?
    Mr. Fox. Most banks, or a lot of banks in Georgia, a high 
number, are under a regulatory order of some sort. And usually 
in those orders, there is a limitation on your lending, there 
is a limitation on how much you can grow. So by virtue of that, 
you have to meet a minimum capital standard and every time you 
make a loan, it usually goes, based on risk-based capital, that 
is going to reduce your capital ratio. So basically, once you 
come under order, all you are managing from that point forward 
is liquidity in capital, that is all you can really do.
    Mr. Scott. Just one last question, if I may, Mr. Chairman, 
this will be my last one. But it just intrigues me that you, 
Mr. Fox--I think you mentioned that you were once an examiner, 
is that correct?
    Mr. Fox. Yes.
    Mr. Scott. So that puts you in a pretty unique position 
here, to be able to add some perspective. And I really want to 
try to get to this, because as I mentioned before, Lynn and I 
find ourselves in a pretty good position with our bill having 
passed the House, and over in the Senate, and we have a pretty 
good bipartisan approach to this bill. That, unfortunately, 
does not happen very often. So we have a very live vehicle here 
and I am wondering--you remember I asked the regulators when 
they were here what they were doing that was so restrictive 
that stopped the lending, and they basically said, it is not 
our fault. But you hear from the bankers here that yes, some of 
this is their fault.
    What is the true story here? You have sat in both seats 
here. Who is telling the truth?
    Mr. Fox. I am not going to call anybody a--
    [laughter]
    Mr. Scott. Let us put it this way, who is more accurate? I 
did not say it correctly; who is more accurate? We really have 
to get to--
    Mr. Fox. Mike made probably one of the best points I have 
heard today about the fact that if someone comes to his bank 
right now, because they are restricted from increasing their 
concentrations in real estate--construction lending, it is a 
presale, it probably has a mortgage takeout--he cannot make the 
loan. That does not make sense. So that's a great example. You 
really need to be able to use some common sense like he is 
saying. Does this credit stand on its own and if it does, then 
we ought to be able to make it.
    Mr. Scott. Okay. So there is some truth to that statement 
and we will just say that we will work with our regulators to 
see what we can do here.
    Thank you very much, it has been a very good session. Thank 
you.
    Chairwoman Capito. Thank you. Before I dismiss the panel, I 
would like to thank them for their very great comments and 
answers to questions and their statements. We will be taking 
this back to Washington, working with this bill and others to 
try to strengthen the possibility of a faster rebound for 
everybody.
    I would like to thank the audience for being a great 
audience and being so attentive and sticking with us. This has 
been a very lengthy hearing. I would also like to thank panel 
one, the four regulators, they are all in the audience, so I 
would like to thank you all for staying and listening as we 
requested, and that is duly noted. Right, Lynn?
    Mr. Westmoreland. Yes.
    Chairwoman Capito. And I would like to also thank Mr. 
Westmoreland's staff for putting this together and at such a 
beautiful facility and I think creating two panels that have 
been very enlightening.
    So with that, the Chair notes that some members may have 
additional questions for this panel, which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for members to submit written questions 
to these witnesses and to place their responses in the record.
    With that, this hearing is adjourned.
    [Whereupon, at 12:20 p.m., the hearing was adjourned.]





























                            A P P E N D I X



                            August 16, 2011

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